Our Opinion: 2016

Brexit : Official campaign launched

Last Friday saw the start of the official 10-week campaign leading to the 23rd June referendum on the UK’s membership of the European Union. Markets will be reactive to swings in the campaign, which can also be influenced by other global events. Opinion polls continue to point to a close contest, with those wishing to remain retaining a lead.

The Electoral Commission has decided who will lead the “Remain” and “Leave” campaigns. The selection of “Vote Leave” to lead the Leave campaign suggests that the agenda will be driven by senior Conservative party figures, most notably Michael Gove and Boris Johnson. Other groups and prominent political and industrial figures may now look to unite with the group, but it is not clear how easy this will be, as individual approaches and issues of focus vary. An often discussed challenge for the Leave campaign thus far – the inability to unite behind a single campaign – may continue to plague it.

As for the Remain campaign, as expected, “Britain Stronger in Europe” has been selected as the official campaign group. The Prime Minister David Cameron, is likely to be the campaign’s figurehead with support from other political parties and from industry. As has already become apparent in the weeks since the referendum date was announced, the Remain campaign clearly sees the economy as the main issue, and is likely to emphasize this as the debate gathers momentum.

Almost half of Conservative party MPs (140 out of 330) have declared that they will campaign to leave the EU. Furthermore, the very high profile resignation of Iain Duncan Smith from the cabinet raises the question whether the Prime Minister has to devote more time to internal party politics than to the referendum.

Voters’ concern over immigration is one factor that could tip the balance in favour of leaving of EU. Although the EU has taken unprecedented steps to stem the flow of immigrants into Greece by striking a deal with Turkey, it is not certain yet that this will be a success. Moreover, Leave campaigners are citing the deal with Turkey as evidence that further EU expansion is forthcoming, which could increase anxiety over migration. The recent terrorist atrocities in Brussels have also brought fears about terrorism back into focus.

Central to the campaign to remain in the EU is the role played by the Prime Minister. He is, according to opinion polls, the most important politician when it comes to influencing the public. The recent “Panama Papers” scandal could damage his credibility with voters who may use the referendum as an opportunity to express dissatisfaction with him and his government.

The Remain campaign will focus more on the economic benefits of remaining in the EU, and the risks to jobs and growth if the UK decided to leave. Meanwhile, the Leave campaign will focus more on issues of immigration and sovereignty. If the Remain campaign struggles to present a convincing economic case for remaining in the EU, it could increase the likelihood of the UK voting to leave the EU. We currently expect the The UK’s economic growth rate is likely to slow as the referendum approaches, especially given the tentative evidence that concerns over the EU referendum are weighing on business spending decisions.

Markets already seem to be adjusting to risks surrounding the EU referendum. Arguably, the largest impact has been seen in the currency markets, with sterling falling against the US dollar and the euro, and the cost of insuring against further downside rising to levels not seen since the financial crisis. In the fixed income markets, expectations that the next interest rate move from the Bank of England will be a cut rather than a hike now stand at roughly one-third; at least some of this may be related to EU referendum concerns.

As for the equity markets, the previously mentioned moves in sterling are having an impact. This year, some domestically exposed companies have been underperforming. Meanwhile, companies highly exposed to the US have been outperforming.

Markets have partially incorporated the possibility of an exit from the EU. However, there are a number of factors, political and economic, that could swing the outcome in either direction over the next couple of months. Markets will remain watchful, and will react to any developments.


22nd April 2016