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 firstname.lastname@example.org. 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.
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.