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People will vote with their gut
As an advisor, I’m neutral on Brexit. In my opinion there is simply not enough tangible, genuinely factual, information that can be fielded in either the ‘Leave’ or ‘Remain’ direction to make an argument strong enough to outweigh personal priorities.
By this I mean, the referendum on Thursday regarding whether the UK should leave the EU, is essentially a political matter. It’s down to individuals to decide for themselves, based on their own particular views and attitudes. There are plenty of smart people campaigning on both sides, and the polls suggest a negligible gap between the Leave and Remain voter numbers. Clearly there is not an obviously wrong nor obviously right answer to the question.
It seems to me that many voters on both sides will decide based on their gut feelings, and attempt to find ‘facts’ to rationalise. The issues are complex and the future unwritten, so many people will follow their vision of what kind of UK they want. The Leave side has built it’s campaign on this - reigning in unlimited immigration, taking back sovereignty, releasing the UK from the binds of the EU. In contrast the Remain side’s campaign has been more about the economic argument, and the gloomy (some will say scaremongering) projections for the UK in event of Brexit.
Who shouts loudest?
On economic matters, there does seem to be a more vocal (if not larger) group of economists on the Remain side. In particular major organisations such as IMF, OECD, the UK Treasury, the US Federal Reserve, have all made an economic argument for Remain. But to be clear, their longer term projection (to 2030) consensus is not that the UK will be worse off post-Brexit, but that it will be less well-off. The Leave campaign argues that these projections do not account for the upside potential of a UK free to do trade deals on it’s own, where they really count. And there are plenty of serious economists on this side of the fence, vocal through organisations such as Economists for Britain.
My spreadsheet is better than yours
It is always worth remembering the First Law of Economics - “For every economist, there is an equal and opposite economist”. We should also remember that all of those organisations - the EU, the Fed, the World Bank, the IMF, the UK Treasury, etc. - completely failed to forecast the global financial crisis, even at the start of the same year that it happened (2009). So the idea that any economist can look forward to 2030 with any meaningful projection sounds suspect, particulary when the argument is about just a few percentage points difference in GDP growth at that future point.
If you have run a business, you know that a ‘business plan’ is basically a spreadsheet. Because a business plan has actual numbers in rows and columns, it is human nature to put too much faith in those numbers. Projections are based on assumptions; any business leader knows that in the next twelve months anything can happen, and quite often does. Economic models are the same; a projection with decimal points might be precise, but that does not mean it’s accurate.
Asia is the new Europe?
There are clear and obvious trade benefits that come from being a member of the EU. But let’s not forget, say the Leavers, that Europe is currently the economically worst performing continent on the planet (excluding Antarctica). When the UK joined in 1973, the EU (then EEC) represented 13% of the global population and 37% of global GDP; now it represents just 7% of population, and forecast 22% of world GDP by 2025 (source: US Gov.). The Leave side argues that this century will be the century of Asia, and that a UK unshackled from an inward-looking Europe will be free to negotiate trade arrangememts that will ultimately count for more.
What happens the day after the referendum, and beyond?
Of course, markets don’t like uncertainty, which explains the current volatility in both equity and currency markets. After the referendum, if the vote is for Brexit then we might expect a plunge in Pound Sterling and UK equities in the shorter term. If the vote is to remain in the EU, we could expect a collective sigh of relief in markets, and gains accordingly.
A vote for Brexit gives the UK Government two years to negotiate terms (nothing changes before then). Whilst that process is ongoing, we should expect continued volatility, but in the medium term things will stabilise. Most likely (the largest consensus across both camps), there will be a recession, but the depth of that recession may (say the Leavers) end up being just a blip compared to the financial crisis of 2009.
So what about my asset allocation?
The UK is the fifth largest economy in the world. Regardless of the Brexit referendum, whether the result is for or against, the UK deserves a role in most international portfolios. Exposure to the UK is often through collective investments with different degrees of focus:
a ‘Global Equity fund or index in which the allocation to UK reflects its share of global developed market listed equities (e.g. for MSCI World Index, around 7%) and usually denominated in USD.
a ‘Europe including UK’ fund or index in which the allocation to UK reflects its share of European listed equity (e.g. for MSCI Europe Index, around 30%) and typically denominated in EUR.
and a ‘UK Equity’ fund or index focused on 100% UK equity, and usually denominated in GBP.
If you are holding any of the above because of your overall asset allocation strategy, then the impending Brexit referendum should not affect that.
Source: Asian Development Bank
2016 GDP growth forecasts. Source: European Commission.