So far, polling evidence suggests a slight preference for the UK staying in the EU. But the risk of a "Brexit" is being taken seriously. This publication explores what wealth managers think of the impact.

(Updates with Rathbone Brothers commentary.)

With Britons going to the voting booths on 23 June this year to decide the UK’s future membership of the European Union, all kinds of economic and business implications arise. As far as the wealth management industry in the UK and further afield is concerned, the stakes are high.

Concerns that the UK could slam the brakes on immigration from the continent or have to re-write trade pacts and other agreements are just some of the issues that bear on the financial services industry.

Sterling has come under pressure on fears of a UK exit and these concerns are arguably a drag on risk assets such as equities. That said, those arguing for a British exit – hence “Brexit” – claim the negative impact of a departure is being exaggerated and that the UK will have more, not less, freedom to negotiate deals on trade with countries such as China, India and the US. They argue that non-EU states such as Switzerland prosper outside the EU, so much so that a currency such as the Swiss franc has become a safe haven amid fears about the euro.

Brexit is already, apart from the US presidential race, the dominant political event of the year and likely to remain so at least until the 23 June poll. In the ruling Conservative government, cabinet ministers and members of the legislature are divided; there are also differences of view among the opposition, although these draw less attention.

To the extent that this publication has been able to establish, judging by the raft of material and press releases sent over in recent weeks, the wealth management sector has a clear preference for the UK to stay in, although there appears to be a considerable variety of viewpoints about the specific impact. Public opinion is evenly divided with a marginal preference to remain in the EU. Over the next few weeks, the editorial team at WealthBriefing invites readers to let us know what they think - contact the editor at tom.burroughes@wealthbriefing.com. We will also be polling readers via the polling option on the home page. 

UBS wants "more Europe", not less
The world’s largest wealth management firm, UBS, hit the ground running quickly at the start of 2016 with a 31-page report, The Future of Europe, saying the solution to the woes of the 28-member EU is not break-up, either through “Brexits” or other secessionist change, but “more Europe” and a major treaty change to make the EU institutions more democratic and have more power.

The Zurich-listed lender, which earns the bulk of its revenues outside its native Switzerland, gave a blunt assessment of the situation by the standards of banks on such controversies: “The answer is more Europe, not less. As former French president Nicolas Sarkozy remarked, without Europe and the euro, conflict would resurface on the continent. The stakes are high.” 

The Swiss bank argues that with or without the UK as a member state, reform of the EU, and tackling the accusations of its institutions being out of touch with voters, must go ahead. Looking at possible scenarios, UBS considers that if the UK exits, reform of the EU through treaty changes could be easier. “The UK revoking of its EU membership could have profound implications for the functioning of the union. Britain’s exit would likely speed up the reorientation of the European Parliament, European Commission and European Council towards the eurozone. Absent the UK, the rump of EU nations outside the single currency would be further overwhelmed by the 'ins’, given the fragmentation of the 'outs’ (eight countries whose economies in total equal the UK’s), and the voting rules in the European Council and the European Parliament.”

“On one level, a UK exit could be seen to promote European integration. It would ensure that, contrary to Britain’s demands, national parliaments would not benefit from national veto powers on legislative proposals from the European Parliament, and it may make an EU treaty change more feasible. On another level, it would lower the global standing of the EU and lead to greater anti-EU sentiment among voters in the euro 'outs’ who feel their interests being swamped by the demands of the larger bloc,” UBS said.

The bank also argued that another possible outcome is that there could be more UK referenda on the membership question. 

Brexit pain
At BlackRock Investment Institute, part of the US-listed asset management giant BlackRock, Brexit is seen as overwhelmingly negative for the UK and its financial sector.

“A newly independent UK would likely have reduced leverage to fashion trade deals for the crucial services sector and less clout to negotiate regulatory standards for EU market access. Both would be lengthy and painful processes, and we see the UK as economically worse off in the end,” BII said.

“The EU, for its part, would lose a major budget contributor, a leading voice for free markets and easy access to a world-class financial centre. A Brexit could spur separatist calls and embolden populist parties across the continent, but we do not see a EU break-up as a result,” it continued. 

Assets will become more volatile in the UK and Europe ahead of the poll; a Brexit vote will hit risk assets but a “remain” vote would cheer such markets, it continued. 

The Institute also predicted that Brexit will push up yields on UK government bonds, weakening portfolio inflows and push up government borrowing costs, likely causing the Bank of England to further loosen monetary policy. Domestically focused UK equities will be hit, and the UK financial services sector will suffer, it said.

At Pictet Wealth Management, part of Pictet, the Swiss bank, Frederik Ducrozet, senior European economist, reckons the negative sentiment weighing on sterling will disappear if there is a “remain” vote; there will be a strong rebound, he expects, to risk markets, not just in the UK but across the European continent in a show of relief.

“The first BoE [Bank of England] rate hike is not priced in until end-2019, while the likelihood of a rate cut this year has jumped to around 30 per cent. Such expectations would likely be adjusted sharply if the UK stayed," he said.

“If the UK leaves, a prolonged period of uncertainty would follow and risk sentiment would likely deteriorate further, leading most observers to downgrade their GDP growth forecasts,” Ducrozet said. 

“There does not seem to be even the beginning of an agreement on a framework for subsequent negotiations on relations with the EU. Our biggest concern is that investors would panic because the new rules will not be known for some time (the fear of the unknown). Depending on the form that a Brexit would take, the macro consequences would range from ‘modestly negative’ to ‘potentially disastrous’,” he continued. “The EU accounts for almost 50 per cent of UK exports. Financial links are even more important, including in terms of the banking sector, broader financial services or Foreign Direct Investment.

"The UK’s relatively vulnerable external position, including a 4.5-5.0 per cent current account deficit, would be likely to make things worse. Some mitigating effects should be factored in as well, included looser monetary policy for longer, but on balance they are unlikely to compensate for the damage to business confidence and activity in the short run,” he added.

A different view
One commentator, Guy Foster, who is head of research at Brewin Dolphin, says that it appears almost all sell-side opinion seems to be that Brexit fears are affecting the value of sterling and an “out” vote will sink the currency. He disagreed, but added that there will be potential negative effects.

“This contention is not backed up by observable historical data or experience. The recent decline in the pound has taken place following a turn in rhetoric from the Bank of England. There is no evidence that it has anything to do with Brexit fears,” he said. 

"We expect that the macro implications of a UK Brexit are likely to be no-to-negative impact on the pound and no-to-negative impact on interest rates. What is negative for the UK should not be seen as being positive for the rest of Europe. The UK’s exit would establish an unhelpful precedent while the trading block without the inclusion of the UK is a tangibly weaker market,” Foster continued.

One issue to consider, Foster said, is that holding the referendum in June meant it was happening as weather improves, with the likelihood of television footage of migrants attempting to enter the EU – a situation likely to encourage anti-EU sentiment in the vote.

Myths

Rathbone Brothers, the UK wealth management house, has issued a paper, If You Leave Me Now, challenging a number of "myths" surrounding the Brexit debate. The report focuses on the following areas:
  
Immigration: The first of these myths is that immigration has held down wages and pushed up unemployment for UK nationals: the evidence suggests this has not happened, Rathbones says, arguing that it does not expect wage growth to increase or unemployment to fall substantially if the UK votes in favour of Brexit; 
 
Trade: The second is that UK trade would collapse after leaving the EU. Firstly, the government may be able to withdraw but negotiate special terms of access to the common market - "soft Brexit". Even under a ‘hard Brexit’, the UK would remain protected from any vengeful treatment by global trade rules, although some sectors would suffer more than others, particularly autos, food and clothing, it says;
 
Financials: The third myth is that the Swiss financial services industry has thrived outside the EU, and that this is a model for the UK. Yet Switzerland’s relationship with the EU could not be replicated. Evolving legislation could push financial services activity towards the Continent if the UK votes for Brexit, it says;
 
Public finances: The fourth myth is that the UK’s public finances would improve substantially if it leaves the EU. A simple calculation suggests the country would be £9 billion better off in the current tax year if it did not have to make contributions to the EU. Yet at least two-thirds of this saving would probably be eroded by associated losses and compensatory domestic public expenditure. Perhaps the greatest risk to UK finances is that Brexit would create uncertainty, which could, by itself, reduce growth; and 
 
Foreign investment: The fifth myth is that foreign investors will withdraw from the UK if it leaves the EU. To date, it is difficult to conclude that the prospect of Brexit is derailing investment flows. 2014 was a record year for inward investment, despite the inevitability of the referendum. Surveys indicate that R&D will be the focus of investment projects over the coming years, and here the UK has unparalleled
attractiveness. Although it is difficult to forecast the long-term implications of Brexit, Rathbones says it doesn't expect a divestment of foreign investment in the short to medium term, but suggest that investor uncertainty could adjourn future inflows.