Thoughts on Brexit
4th April 2016
With the campaigning for the referendum on the UK’s membership of the EU now fully underway, the investment community is beginning to consider the effects the referendum, and its result, may have on the economy and the stock markets. Those who remember the 1975 Referendum may be forgiven for feeling a sense of deja-vu.
Before getting into the detail of the matter, two points are worth clarifying. Firstly, Cantab Asset Management does not take a political position, and seeks to achieve good returns for clients in all climates. Secondly, the forecasts for what happens to the economy in the event that the UK votes to leave the EU are very varied, not least because the effect of leaving would largely be determined by the actions of the UK and other nations which cannot be known at this time. Almost always, these predictions seek to advance the author’s own political position (so that those supporting ‘Remain’ say that remaining is good for the economy whilst those supporting ‘Leave’ say that leaving is good for the economy). This makes it difficult to comment on the future of the economy, although it is possible to draw some general conclusions.
Currently, Brexit looks unlikely. A majority of polls already show that voters will vote to remain in the EU, and history has also shown that those who are undecided are more likely to support the status quo. This points to the UK remaining in the EU.
In the event that the UK votes to remain in the EU, uncertainty will have been removed. This will most likely cause an improvement in market sentiment as markets in general prefer certainty.
Investors should beware prophecies of doom if the UK votes to leave the EU. We will not be waking up to a UK outside the EU on 24 June, whatever the result. The withdrawal would not be a sudden shock event as there is a defined, preannounced process for leaving the EU (described in Article 50 of the EU treaty).
The negotiation period is limited to 2 years, and so any further concerns would be relatively short term. Once these are resolved, markets would again likely experience more positive sentiment.
The EU referendum is certainly a cause of immediate uncertainty, and the mere fact it is happening may be a drag on stock markets. However, it should be remembered that investments are for the long term, and that short term uncertainty should not be overly worrying: historically equity markets have always recovered from periods of uncertainty.
In conclusion, whilst it is difficult to be sure of the direction the country would take after a vote to leave the EU, although such a vote is unlikely, it is possible to say with confidence that the stock market is likely to recover from any temporary period of uncertainty surrounding it over the long term.