Banks urge investors to consider U.K. exit risks, as opinion polls shift

Banks urge investors to consider U.K. exit risks, as opinion polls shift

6 October 2015, 20:11
Alice F
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Citigroup, UBS and Morgan Stanley are among the lenders advising clients to pay more attention to the so-called Brexit debate. They are doing so as opinion polls signal decreasing support for being a part of the 28-nation trade bloc even before Prime Minister David Cameron sets a date for the referendum he has promised by the end of 2017.

  • Citigroup last month raised its probability that voters will choose to withdraw from the EU to as high as 30 percent;
  • Nomura boosted its estimate to 25 percent;
  • Societe Generale predicted there is a 45 percent chance.
  • Morgan Stanley said last week that the chance of leaving is not “adequately priced” into U.K. markets.

David Tinsley, an economist at UBS in London, said market players should expect "some volatility if the possibility of departure increases."

According to UBS, indecision over the vote outcome may drive gilt traders to discount any prospect of an interest rate increase from the Bank of England in the advance of the ballot. Expectations for a 2016 rate hike faded further on Monday after a weaker-than-forecast report on services highlighted the fallout from cooling growth in China and emerging markets, Bloomberg said.

Anti-EU sentiment

... may be boosted by the Europe migrant crisis, and there are fresh questions over the opposition Labour Party’s traditional pro-EU stance since Jeremy Corbyn became its leader.

Leaving the EU would threaten the U.K.’s tariff-free access to 500 million customers - last year the EU bought almost half of British exports of goods and services - as well as its ability to attract foreign investment and shape continent-wide regulations.

Those who stand for exiting, say new trade accords could be struck and that the EU drowns businesses in red tape, drains taxpayer money and leaves the U.K. fragile in the face of an influx of foreign workers.

Polls

Opinion polls begin to shift which may trigger a market rout similar to the one which happened before the Scottish referendum 2014.

  • A YouGov survey issued last week found 40 percent wanted to leave the EU and 38 percent wanted to stay - which gave the Brexit camp an advantage for the first time in almost a year.
  • The Institute of Directors has warned of a 50-50 risk, adding that a referendum in 2017 threatens to become “a chance to whack the political elite” after almost seven years of Tory rule, instead of a vote on the issues.
  • A report released Friday by the Open Europe think tank, which investigated recent public statements by the Conservative Party’s 330 lawmakers, revealed that 69 would probably back an exit from the EU, with 203 likely up for grabs. Only 58 seem assured to vote for Britain to remain in the bloc.

Whatever the result will be, analysts generally agree that ahead of the event, markets should await associated uncertainty to have an impact on investment decisions and capital flows.

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