JPM Fund Manager

Investors braced for EU referendum turbulence

On June 23, Britain will vote on whether to remain a member of the European Union or leave. Should the referendum result favour a British exit, there will be major implications for UK business and hence for investment. But with Europe in flux, a vote to stay in the club would also have a potential impact. And what is true for UK companies and investors is true on the other side of the Channel. Whatever the electorate decides, the ramifications of that single day’s voting will be felt far and wide.

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Apr 21, 2016
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On June 23, Britain will vote on whether to remain a member of the European Union or leave. Should the referendum result favour a British exit, there will be major implications for UK business and hence for investment.

But with Europe in flux, a vote to stay in the club would also have a potential impact. And what is true for UK companies and investors is true on the other side of the Channel. Whatever the electorate decides, the ramifications of that single day’s voting will be felt far and wide.

A key player

Britain is one of the European Union’s “big four”, those countries that are also members of the Group of Seven rich nations (G7), the others being France, Germany and Italy. A vote to leave would fundamentally reshape the EU in a way that the departure of a smaller member-state would not and would have huge implications for businesses and investors on both sides of the English Channel.

However, the EU is changing shape anyway, with moves to fuse the 19 eurozone states into a more coherent fiscal and political bloc possibly leading, in effect, to “three EUs” – the euro area, the permanent non-euro members Britain, Denmark and Sweden, and the east European countries that are technically supposed to join the single currency but show no immediate sign of doing so.

That means a vote to remain would also have repercussions, both in Britain and on the wider European stage. More of that in a moment.

We have a wealth of experience in investing in UK and European markets, throughout different market cycles, to identify companies with the greatest long-term investment potential.

‘Brexit’ consequences

First, the “leave” option is the one that would have the most immediate impact, representing the biggest and most wrenching re-orientation of Britain’s international alignment since the initial application to join what was then the European Community in 1961, with membership following 12 years later. For UK businesses and investors, there would be a key question: what would be the new arrangements for access to the European market?

Nobody can know, beyond noting that the Lisbon Treaty specifies a two-year negotiating period for any country wishing to leave, with the option to extend further if both parties deem it necessary. It may be useful to see where the incentives lie on both sides in terms of coming to the best possible deal.

“The UK accounts for just one sixth of the EU economy,” according to a report from the international public affairs consultancy Global Counsel. “One tenth of EU exports are to the UK, whereas half of UK exports are to the EU1.” But, it adds, this imbalance is not quite as disadvantageous to Britain as it may seem, because “the UK is an important source of demand for the EU”.

According to the Office for National Statistics, the UK runs a current account deficit of £107 billion with the other EU countries, the biggest factor by far in the country’s £92.8 billion deficit2.

This brings the other side of the equation into focus, the impact of a Brexit vote on fellow EU member-countries. Global Counsel notes that their trade surplus with the UK is important to many countries and exceeds one per cent of gross domestic product (GDP) in the Netherlands, Poland, the Czech Republic, Belgium, Hungary, Latvia, Lithuania and Slovakia1.

However, within the overall British deficit, there is a surplus on trade in services of £17 billion, much of it accounted for by the huge financial centres in the City and Canary Wharf. So while the goods exporters of much of the EU would be understandably nervous about a vote to leave, so too would London’s major financial institutions.

Non-EU trade

What of the argument that Britain’s non-EU trade is becoming more important?

According to the Office For National Statistics (ONS) on June 26 2015: “Strong economic growth in many developing economies outside the EU has resulted in non-EU economies growing in importance to UK trade, with the proportion accounted for by the EU falling consistently since 1999, despite the value of EU trade increasing3.” So those companies with a strong overseas rather than European focus may become relatively more attractive, given that a leave vote would have little if any impact on their operations.

As for trade in general after a vote to leave, Global Counsel sees both pros and cons in going it alone. The UK would be a less important player alone than as part of the EU, thus less significant in trade talks. Furthermore: “The EU has considerable experience negotiating deep and comprehensive trade agreements.” That said: “The UK would gain flexibility in negotiating trade deals and in particular be less encumbered by agricultural protectionism1.”

There is a similar swings-and-roundabouts effect predicted with regard to the prospect for direct investment, with any loss of attractiveness of Britain outside the EU as an investment destination being possibly compensated for by the UK’s ability to undercut EU social legislation and taxation “once largely liberated from the constraints and obligations of EU membership1”.

This could hurt businesses in the rest of the EU as investment is tempted away from them to what could be seen as an offshore centre.

As for the wider effects on the global economy, the International Monetary Fund (IMF) finds the prospects alarming. On April 12, in its latest World Economic Outlook, the IMF warned: “[T]he planned June referendum on European Union membership has already created uncertainty for investors; a ‘Brexit’ could do severe regional and global damage by disrupting established trading relationships4.”

The status quo disrupted

As for a vote to remain, it would be a mistake to see this as simply opting for the status quo. The “Five Presidents’ Report”, drawn up by the presidents of key EU institutions including the European Central Bank, urges much deeper integration of the eurozone including tighter fiscal union5.

The UK would be far and away the most important economy to be permanently outside such a union, with implications for businesses and investors both in Britain and the eurozone. This could include the fraught issue of a tax on financial transactions, favoured in much of the eurozone but opposed by the UK.

Uncertain future

The outcome of the British EU referendum will be hugely significant for investors whatever the result. A vote to leave would open the question of what future commercial, trading and financial links would be in place between Britain and the remaining EU, while a vote to remain would raise the question of how the UK would fit in alongside a rapidly integrating eurozone.

There are uncertainties in either direction, putting a premium on deep investment experience and detailed research of companies and markets both in Britain and across the continent.


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Sources: 1Global Counsel 2Office for National Statistics 3Office for National Statistics 4International Monetary Fund 5European Commission


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Go to the profile of Simon Crinage

Simon Crinage

Head of Investment Trusts, J.P. Morgan Asset Management

Simon Crinage is Head of Investment Trusts, responsible for the management and development of J.P. Morgan Asset Management's IT Business.

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