The arguments for and against Britain remaining a member of the European Union have gathered in momentum over the last few days. With less than two weeks to go, the debate is at a peak and there seems to be more tub-thumping than clarity from the press and campaigners alike.
Personal opinions amongst the team at LIFT-Financial are inevitably varied, but as financial planners, our emphasis has to be on what we believe the short, medium and long term impact will be for our clients. We’ve considered what effect a vote either way will have on the economic environment and ultimately our clients’ financial position. I think at this point it is important to point out that the eventual impact on the economy – either way – is very much unknown. Indeed, UBS (the Swiss Bank) have modelled over 200 potential economic scenarios that could emerge as a result of the vote!
The economy & trade
What are the economic advantages and disadvantages of Britain leaving the EU? Will the result affect invested assets and what about interest rates?
Leaving the EU would result in an immediate cost saving for the British Government. In 2015, Britain contributed £13bn to the EU budget; offset by £4.5bn worth of revenue. To put that in context, the net position of £8.5bn equates to approximately 7% of what the UK Government budgeted for the NHS in 2015/16.
However, do the financial advantages of EU membership outweigh these upfront costs?
Membership of the EU has given Britain a hand in negotiating the trading rules of the free market, particularly important when you consider that more than 50% of our exports go to other EU countries. There are also the ongoing negotiations between the EU and the US to create the world’s biggest free trade zone; something many believe would be very good for British businesses.
Exiting the EU would give Britain the freedom to establish its own trade agreements but we also risk losing the negotiating power currently afforded as a member state. It could involve years of negotiations with no guarantee of achieving the same agreements we enjoy today.
Whilst noting some clear-cut advantages of a Brexit, The Economist concluded that Britain would find itself a ‘scratchy outsider with somewhat limited access to the single market, almost no influence and few friends’. The Guardian documented the American Government’s fears that the ‘EU referendum is a dangerous gamble that could unravel with disastrous consequences for the entire continent’.
The impact on personal assets and investments
The question from a number of our private clients has been ‘should I be changing my portfolio or investing at all at the moment?’. The reality is that either scenario – stay or go - could produce a different and unexpected result. There can be no second guessing the market and that has always been the case, even in times of more certainty.
Investments should always be considered long-term after immediate and short-term financial commitments have taken priority. As long as these financial building blocks are in place, attempting to position portfolios to anticipate short-term events will often prove counter-productive over the longer-term – it is impossible to guess how markets might react with consistent success.
It is important to remember that volatility is a natural consequence of investing which is why a long-term view should be the case with any investment you make. Even if Britain were to leave the EU, nobody can say with any certainty what the significant and permanent investment implications will be.
That said, for those with cash to invest, a phased investment strategy, over a three to six-month period for example, would serve to mitigate the risk of poor market timing at a time of uncertainty.
A more immediate consequence in the event of Brexit would be the potential for a rise in interest rates.
Whilst this may placate cash savers, households with debt will invariably suffer. A repayment mortgage of £200,000 over a 25-year term would see an annual increase in cost of around £700 on a rise of 0.50%; increasing to nearly £1,300 against a rise of 1%.
Would a Brexit force the Bank of England (BoE) to take such action? The likelihood is yes. Leaving the EU would create uncertainty in Britain’s trading relationships with other countries and investing in the UK could be seen as riskier by overseas investors. This result will be a weaker pound and to halt the potential slide, the BoE could be forced to put up interest rates.
Overseas investors would also charge us more for lending, resulting in an increase in the cost of our debts. A study published by the BoE indicated that £65billion has left the UK or been converted into other currencies during March and April this year. In the six months to the end of April, this figure is £77billion, compared to just £2billion in the six months to the end of last October - tangible evidence that investors are moving billions of pounds out of Sterling ahead of the EU referendum.
It is widely believed that Britain’s exit from the EU, combined with a change to monetary policy, would lead to one outcome - a recession. George Osborne believes a ‘DIY recession’ could last up to one year. A Treasury ‘shock’ scenario has suggested more than 800,000 jobs would be at risk and GDP would grow by 3.6% less than if Britain were to remain in the EU. Stalling economic growth would have adverse effects on the strength of the pound, unemployment would rise, average wages would fall, as would house prices. Of course, a forecast is not a definitive outcome but the Treasury’s analysis is founded upon a tried and tested economic model and heed should be taken of this analysis.
Whilst most politicians and economists have waded in on the Brexit debate, the average of the last six polls suggests the Remain and Leave campaigns are closely matched but with Remain holding a consistent lead of between 55% and 51% since September 2015.
With an average of 15% of the electorate remaining undecided, logic would suggest this group of voters are likely to swing the pendulum one way or the other. At 10pm on 23rd June, all bets will be off and it will be the eligible voters who decide Britain’s fate within the European Union.
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