The tension mounts
With only a few weeks to go before the EU (European Union) referendum on 23 June the ‘Remain’ versus ‘Leave’ debate is in full swing with campaigners vociferously presenting their arguments both factual and emotive. The British electorate can be forgiven if they are left somewhat bewildered by the plethora of facts and passionate outpourings which are flooding the media.
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It is evident from numerous surveys that the majority of businesses are pro EU although this stance is likely to be primarily influenced by any short term negative impact on their trading performance. For the individual the issues are wide ranging and more complex so there will be plenty of soul searching before people reach a decision which aligns with their views. While the latest polls suggest a preference for remaining in Europe, the political debate is intensifying.
Here at Willis Owen we adopt a neutral stance and simply aim to report on the views which have been put forward by various influential voices. In our previous blog
on this topic we outlined the key issues worthy of consideration when deciding which way to vote. Here we take a look at who is lobbying for the opposing sides, the issues they are focusing on and what success they are having in getting their message across to the voting public. We pay particular attention to the implications for the economy and stock market investors.
The official ‘In’ and ‘Out’ Campaigns
There were no surprises in the awarding of official campaign status to ‘Britain Stronger in Europe’ and ‘Vote Leave’. The former was the only applicant for ‘Remain’ and the latter - backed by Boris Johnson and Michael Gove - narrowly defeated close rival Grassroots Out which was orchestrated by UKIP leader Nigel Farage. Official designation brings funding of up to £7m for promotional activities while unofficial campaigners are far more restricted in what they are allowed to do. However, all Brexit (short for British Exit) supporters were infuriated when the government also undertook its own £9m mailshot to every household in the country presenting its rationale for remaining in the EU.
The message from the ‘Remain’ camp
‘Britain Stronger in Europe’ and other groups affiliated to the ‘Remain’ contest do appear to be showing greater unity in their cause. Led by former M&S Chairman Lord Rose, the movement has brought together influential names from the fields of politics and business, along with prominent bankers and economists. It has the support of a plethora of pro-EU campaign groups, including the European Movement, Open Europe and the Centre for European Reform.
The emphasis is on the economic benefits of membership, the greater global influence that arises from being part of the EU and the uncertainty that will prevail if we leave the union. Advocates contend that it would make no sense to withdraw from a free trade area, with a population in excess of 500m citizens, which accounts for around 44% of UK exports. It is envisaged that more jobs will be created inside the EU, prices will be lower and there will be greater financial security. They also maintain that alternative trade agreements could take years to formulate, citing the 7 years it has taken to negotiate the EU-Canada agreement and pointing out that we already benefit from 53 trade deals via membership.
Another key assertion of this camp is that security is stronger in the EU due to intelligence sharing and surveillance powers which could be lost. The former heads of national Security Services MI5 and MI6, John Sawers and Lord Evans, are quoted as saying that leaving the EU could ‘undermine our ability to protect ourselves from terrorist plots’.
The message from the ‘Leave’ campaign
Vote Leave figureheads include Boris Johnson, Michael Gove, Lord Lawson and UKIP's Douglas Carswell. Campaigning is focused on the highly sensitive issues of immigration and the excessive costs of EU membership. On immigration they propose that the UK government could still allow EU citizens to work here but under our control rather than having unrestricted inflows which put pressure on public services. All ‘Brexiteers’ seem to acknowledge that addressing immigration concerns is the best way of attracting voters though some of the peripheral activist groups are striking out alone and addressing a wider agenda such as reducing regulation and expanding trade with faster growing economies such as China.
Michael Gove, the justice secretary and chairman of Vote Leave, has warned that Britain will be subject to a migration "free-for-all" as the next wave of EU expansion gives millions of additional people the right to live here. Other spokesmen quote statistics highlighting the large sums sent to Brussels and suggest they could be better deployed on services such as the NHS. Frequent reference is made to the ‘£350m Britain hands to Brussels each week’ although critics point out this is a gross figure and it does not take into account rebates and other payments we receive from the EU so the net figure is closer to £190m.
Given the multiple routes that could be taken outside the EU, Vote Leave are unable to provide any independent studies that conclude the economy would benefit from a Brexit so are broadly advocating short term pain for long term gain. Nevertheless, a group of “Economists for Brexit” which includes respected commentators such as Professor Patrick Minford, Roger Bootle and Gerard Lyons has produced a report claiming that leaving the EU could actually boost UK GDP by 4% largely based on the hypothesis that the removal of trade barriers will trigger a fall of 8% in consumer prices.
The Government advocates continued membership of the EU
The Treasury has produced a lengthy document analyzing the impact of membership and the alternatives. The publication claims that families would be £4300 p.a. worse off by 2030 outside the EU. The Treasury premise is that Brexit would reduce trade and leave a £36bn p.a. gap in public finances which to rectify would require the equivalent of 8p extra on the basic rate of income tax.
The views from leading economic & financial institutions
The OECD (Organisation for Economic Cooperation and Development) analysis concludes that 3% would be knocked off GDP leading to UK households facing an annual £2,200 “Brexit tax” by 2020 and between £3,200- £5,000 by 2030 outside the EU. In the longer term, it calculates that more restrictive trading arrangements with the EU along with less competition, lower foreign direct investment and fewer skilled immigrants, would hit GDP by approximately 5%, slightly less than the Treasury’s 6.2% figure.
The IMF (International Monetary Fund) has warned that Brexit ‘could do severe regional and global damage’ to economic prospects by threatening trade relationships and hurting growth. The IMF said that after growing 2.2% in 2015, the UK economy is now expected to expand by only 1.9% in 2016, down from a forecast of 2.2% made by the Fund in January.
The Governor of the Bank of England, Mark Carney, observed that leaving the EU is one of the biggest risks to UK financial stability and could result in an extended period of uncertainty culminating in slower economic growth. The Central Bank does not take an official stance on the referendum but said it had ‘a duty to report on its judgement of the potential risks and the impact on its ability to maintain monetary and financial stability.’
Global asset manager BlackRock has expressed the opinion that Brexit would hit equities, the Pound and London property. It also believes it would result in lower UK growth and investment and potentially bring higher unemployment and inflation.
World leaders add their voice to the debate
A number of international figures have openly expressed their views on the referendum outcome including President Obama. The United States, EU members (with the possible exception of France) and most of the Commonwealth appear to be expressing a preference to deal with Britain inside the EU. We outline below a selection of opinions that have been expressed.
The ‘Remain’ campaign chose President Obama’s UK visit to support their cause, hoping to benefit from his high UK approval ratings of over 70%. In a speech he declared that Britain would be ‘at the back of the queue’ for a trade deal if it left the EU and Americas priority would remain dealing with the EU Bloc.
The US President stressed that remaining in the EU is integral to protecting Britain's 'special relationship' with the US. The White House also issued a separate statement saying that ‘The British economy will be weaker, its international influence will be reduced and the EU will be damaged if the UK votes to leave the Bloc in June.’
President Barack Obama and German Chancellor Angela Merkel also agreed to work to get final approval of a trade agreement between the US and EU. Vote Leave campaigners challenged Barack Obama's claim that it could take up to ten years for the UK to secure a new trade deal with the US if the country votes to leave the EU.
It is worth noting that potential successors to Obama after the Presidential Election in November have differing views. Hillary Clinton believes the UK should stay in the EU while Donald Trump supports a Brexit.
The Japanese Prime Minister, Shinzo Abe, warned that his country’s investment in Britain (currently £38bn) could reduce if it no longer provides ‘a gateway’ to Europe. He declared a preference for the UK to remain in the EU.
An impartial presentation of the facts – websites which assert neutrality
There are a couple of websites which aim to present an independent view and provide verified facts alone. The UK in a Changing Europe
is run by a group of academics and aims to produce evidence based research to present an impartial case. It is funded by the Economic and Social Research Council (ESRC).
offers a fact checking service. The EU only represents part of its work but it offers a range of materials particularly about immigration. It proposes to offer impartial answers to some of the most widely asked questions regarding the referendum such as immigration and cost of membership.
The polls and the bookies!
Earlier in the year the referendum result was looking a close call with perhaps the Eurosceptics slightly having the edge. However, the latest opinion polls point to a shift toward ‘Remain’:
Source: What UK thinks.org
The ‘Remain’ campaign has moved ahead since Obama’s speech and the most recent FT poll of polls (17th
May), which includes those who are undecided, showed 46% for ‘Remain’, 40% for ‘Leave’ and 14% undecided. On-line polls suggest it will still be a tight race although telephone polls, which have historically proved more accurate, predict a greater share for ‘Remain’ and a recent such poll from ORB gave a 15% lead to ‘Remain’. Moreover, the polling organizations concede that some ‘typical’ pro EU voters (defined as wealthy and/or socially liberal) are harder to reach when conducting a poll.
The bookmakers also have a decent record with their predictions. They have for some time been predicting a comfortable win for 'Remain' and have recently shortened their odds further with the implied chance of Britain voting to remain in the EU standing at 83% with William Hill and a little lower at 77.5% with Betfair.
However, analysts point out that the ‘remain’ camp could appear to win the debate but still lose the referendum depending on whether people actually vote. The polls indicate that there is an ‘enthusiasm gap’ between ‘Remainers’ and ‘Leavers’ with the Brexit supporters consistently saying they are more committed to turning out on the 23 June.
When we last wrote about Brexit we included our own poll to ascertain how our own customers were planning to vote. This showed a preference for Brexit with 50.2% saying you would vote to leave and 30.3% to remain; the remainder was unsure or not voting.
The tabloid newspapers have adopted a clear stance in favour of Brexit though the Telegraph and the Times are presenting a somewhat more balanced view. The Financial Times is for remaining in the EU on economic grounds. However, with the decline in print readership and advent of digital media it is unclear how big an influence they carry these days.
So what are the implications for investors?
The Monetary Policy Committee (MPC) kept interest rates at 0.5% at its latest meeting and commented that referendum uncertainty was responsible for most of the sterling weakness while nervousness was also hurting growth. The MPC also noted the deterioration in investment intention surveys, postponement of IPOs, and weaker demand for corporate credit. The Bank of England has reduced its GDP forecast to 2% (from 2.2%) for this year.
UK economic performance has undoubtedly weakened, with GDP growth slowing to 0.4% in Q1 of 2016. The latest Markit survey showed that manufacturing has contracted for the first time in 3 years while the important Services sector recorded its slowest growth for 3 years. Economists now expect little or no growth in Q2 which could mean Britain moves from being the fastest growing of developed economies to one of the slowest. Of course it is impossible to say for certain how much can be attributed to EU referendum uncertainty and how much is down to the wider global slowdown.
Nevertheless, these trends have likely contributed to the heightened market volatility and concern over the UK domestic economy has been reflected in stock market performance with particular weakness occurring in sectors such as Retailing and Housebuilding. The Gfk consumer confidence index for March found that optimism about the UK economy had fallen to -12 points from +6. Many Fund Managers consider that Brexit poses the biggest risk to the Financial Services sector and are cautious on Banks and Property.
Of course the UK stock market is only partly linked to the fortunes of the UK economy due to the significant overseas earnings of many listed companies. So some companies may actually benefit from Britain being outside the EU if satisfactory trade agreements with other countries are put in place. Furthermore, the anticipated weakness of the Pound would assist exporters. Sterling seems to exhibit a close correlation as the possibility of Brexit rises; it lost over 10% in Q1 before recovering half these losses after Obama’s speech rallied the ‘Remain’ preference.
Another major concern surrounds the fact that overseas investors own a quarter of the UK Government bond market. If Brexit and subsequent currency weakness resulted in selling pressure this could have serious ramifications on how the UK funds its large current account deficit which reached over 7% of GDP in Q4 of 2015 (the widest for 30 years).
Finally, Brexit could put the whole future of the European Union in doubt which would in itself be a source of further uncertainty and volatility for investors across Europe. In other regions the implications are less serious which highlights the importance of ensuring that your investments are well diversified geographically.
Currently, the odds appear to be in favour of continued EU membership although there is considerable inconsistency across polls. Furthermore, the significant number of undecided voters means that any speeches or intervention by prominent figures can easily change voting intentions, as we saw with President Obama. The level of turnout is another issue- persuading the disengaged younger age groups to exercise their right to vote could be a decisive factor as they are more likely to vote for status quo.
Whatever your view on more sensitive issues like immigration and sovereignty it seems probable that a Brexit would have a negative impact on the economy which in turn would affect the stock market. The ‘Leave’ crusade is unable to provide any statistical reassurance due to the lack of a precedent; this is because no country has left the EU before, so it is impossible to state definitively what the consequences would be.
More than ever we see the need for a well diversified portfolio. Geopolitical events have a reputation for being a buying opportunity when we look back in history so the brave investor may be tempted to test the water if we see further bouts of nervousness ahead of the referendum. Similarly, if the market were to fall sharply in the event of a Brexit this could also present another buying opportunity for investors with a long term horizon.
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Important Information: We do not give investment advice so you will need to decide if an investment is suitable for you. If you are unsure whether to invest, you should contact a financial adviser.