Brexit – What you need to know

The term Brexit has become commonplace in the UK over the past year and, as the referendum date creeps closer, the arguments for and against are building momentum.

With both sides seemingly arguing a strong case, what decision we make as individuals will largely depend on our own personal circumstances and how a decision in either direction will affect how we conduct our business. According to the FT poll of polls, 45% want to stay, 42% want to leave with the remaining 13% undecided. Yet, as the last general election proved, polling agencies’ data is far from perfect.

Whilst David Cameron’s recent renegotiation of Britain’s terms of membership were hoped to alleviate some of the public’s concerns about being part of the EU, critics have suggested these will make little difference as they fall far short of what David Cameron had originally promised when he called for a referendum.

There are many factors contributing to the uncertainty surrounding the Brexit campaign. Here are a few of the most debated.

Cost of membership

The UK is a net contributor to the EU budget, with a gross contribution of £17.8bn in 2015 but receiving a rebate of just £4.9bn. With the gross cost calculated to be £350m a week, Brexit ‘leavers’ argue that this money could be prioritised elsewhere and that the UK would have more say over how the money transferred back to us is spent. Remain supporters however claim the economic benefits of membership far outweigh the costs and that after Brexit, the UK would still have to contribute to the EU budget to retain access to the single market.

Immigration

Perhaps one of the most hotly contested topics, immigration has formed a large divide amongst voters. Currently, total net migration to the UK is running at over 300,000 a year, despite the government’s target of cutting it to fewer than 100,000. Remain voters argue that immigrants, especially those from the EU, pay more in taxes than they take out and that this is further bolstered by the new terms David Cameron has agreed with regard to the in-work benefits that new EU migrants can claim during their first four years in the UK. Leave voters however claim that public services are under strain because of the number of migrants and that high immigration has driven down wages for British workers.

Trade and Economy

With approximately half of UK trade being conducted with the EU, there are concerns over how our trading relationship would be affected should we leave. With the UK importing more than we export, some argue that the EU needs us and our relationships will continue, even if under newly negotiated terms. Others argue that our importing of goods is a sign of our dependency on the EU and that Brexit could cause an economic shock that would slow growth and push up costs of imported items.

Work and Pay

Leave campaigners argue that less regulation in the workplace would create more jobs and that tightened immigration would in turn link to better wages. We could also set our own maternity leave and holiday pay conditions. Conversely, remain supporters say that our EU membership has brought about guaranteed holiday pay, paid maternity leave and better protection in the workplace. The UK also gets £66m investment every day from the EU.

What about the financial markets?

Although Brexit is largely a political issue, whether in or out of the EU, there will ultimately be some economic impacts, but purporting to quantify these with any accuracy would be misleading. That said, from a financial market perspective, there are several potential outcomes that have been predicted by industry commentators.

The impact of Brexit won’t be felt in one swift hit – under the treaty terms, any exit will take at least two years to negotiate, causing some to view this transition as a prolonged period of uncertainty. An immediate reaction has been that of a weaker currency, which has already been witnessed to some extent when Boris Johnson announced his support of the leave campaign. A weaker currency can been viewed as a mixed blessing – the UK equity market has a large proportion of exporting companies (circa 70% of FTSE 100 earnings come from overseas) which means exporters benefit as their overseas earnings increase in sterling terms as their good effectively become cheaper for overseas buyers. However, negative sentiment towards the pound could potentially induce some of the economic consequences that people fear, such as a delay to external investment and an increase in the cost of imported goods.

Credit Suisse analysts predict leaving EU would cause snap recession, hit share and house prices and knock up to 2% off GDP. The accord is that investors would likely demand a considerably higher risk premium to hold UK assets as the price of equities, real estate and gilts fall.

The gilt market is influenced by low interest rates which help to keep gilt yields supressed. However, should we leave the EU and the UK becomes considered a riskier place to invest, there is plenty of room for an increase in yields. This could also feed through to corporate bonds, where uncertainty over our ability to continue to trade with the EU could cause credit spreads to widen causing capital losses for bond holders.

Commercial property is thought to be fairly protected however if foreign investment is slowed or delayed following an exit of the EU, the market could see some market deceleration until stability begins to return.

The advice for investors, as it has always been, is to hold diversified portfolios, allowing them to spread risk and potentially ride out any short term impact that the EU referendum may have on financial markets.

The general consensus is that only time will tell – if we remain, little is expected to change, even in spite of the new terms recently agreed by David Cameron. If we leave, it will be our ability to renegotiate our trading relationships with EU businesses under our own terms, how we reallocate the money we save from not paying EU membership and how we continue to demonstrate that the UK has a lot to offer those that we do business with.

Sources: http://www.bbc.co.uk/news/uk-politics-32810887
http://www.bbc.co.uk/news/uk-politics-32793642
http://www.theguardian.com/politics/2016/jan/25/brexit-would-trigger-economic-financial-shock-for-uk
http://www.parmenion-im.co.uk/brexit-sterling-and-market-impact