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9th March 2016

Edward Smith, Asset Allocation Strategist at Rathbones, on the five common 'myths' of Brexit

The UK is preparing for another referendum on Thursday, 23 June 2016. The debate about whether the UK would be financially better off by leaving the EU and going it alone has intensified. There is increased campaign rhetoric from both sides, and a number of 'myths' emerging. Here's five I can dispel:

1. 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. Therefore, we do not expect wage growth to increase or unemployment to fall substantially if the UK votes in favour of Brexit.

2. 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.

3. 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.

4. 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.

5. 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 research & development 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, we do not expect a divestment of foreign investment in the short to medium term, but suggest that investor uncertainty could adjourn future inflows.

Make an informed decision

The referendum result could push the UK in several different directions, which makes it difficult to forecast the long-term effects on the economy. In an increasingly globalised world, the UK economy should do well if the country can successfully negotiate new treaties of economic integration with higher growth nations.

In the short term, the referendum is unlikely to have a substantial directional impact on financial markets. Yet we expect markets to react to any lack of clarity and associated uncertainty. Sterling is likely to suffer the most volatility, and there are indications that currency traders are positioning for some extreme moves.

It's a subject we are all likely to discuss in the coming months, either down at the pub or in the comfort of our own home or offices. Whilst headlines are likely to be sensationalist, it's important we all assess the facts and make an informed decision.

To help, we've written a longer paper on the subject, called 'If you leave me now', to assess the impact of the referendum on the markets and investment strategy.

It shows that the economic and financial implications of either decision are more finely balanced and multifaceted than the current rhetoric suggests, or is likely to suggest, as the referendum approaches.

Research Rathbones' Elite Rated funds

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Edward's views are his own and do not constitute financial advice.

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