The possibility of Britain leaving the EU has caused lots of noise in the press. But what would it mean for UK investors? Let’s take a look at three key factors.
1) Costs of doing business
Brexit would probably mean higher costs for UK investors. UK-based asset managers would likely lose access to the passporting arrangements that currently allow them to distribute funds into EU markets. This might lead them to set up additional offices in continental Europe, and it’s likely that the cost of doing this would be passed on to the end investor.
The alternative argument is that the cost of investing in the UK could fall due to a removal of regulatory costs imposed by the EU. So overall, the net effect is still probably to increase costs, but admittedly it’s not completely clear-cut.
2) Market volatility and investor uncertainty
Speculation about the UK leaving the EU has already caused increased market volatility, especially for sterling-denominated assets. Some studies have suggested that Brexit could cause sterling to weaken further, perhaps by up to 20%. This might suggest that investors should avoid allocating their assets to the UK. But of course, by now, some of this effect is already priced in. And if Brexit doesn’t happen, then sterling assets might represent good value.
So the short-term impact of Brexit occurring would be disruptive, but it’s less clear how significant this impact would be for a long-term investor holding a well-diversified global portfolio.
3) The UK economy
Probably the most important dimension of Brexit is how it might affect the UK economy and, by extension, the incomes of UK citizens. There’s a range of estimates on how the UK economy might be affected; some are positive but the majority are negative.
Post-Brexit, the UK would lose the favourable trade tariffs that EU membership bestows. And inward flows of investment by firms, for example wanting to establish a UK base to access the single market, might be discouraged. There might also be a negative impact from restrictions on the number of EU citizens coming to work in this country, something that has boosted the economy and tax revenues in recent years.
The argument that Brexit would increase UK GDP assumes that trade with non-EU countries could increase (even though such trading opportunities already exist within the EU). The anti-EU camp also argues that removing excessive EU regulation might allow higher growth. But the UK is already one of the least regulated economies in the EU. What’s more, many of the existing EU regulations that apply to UK businesses were initiated or supported by the UK government. In some cases, the UK government has introduced rules over and above those that apply elsewhere in the EU. Finally, on immigration, it would still be possible for EU citizens to work in the UK post-Brexit, but the choice of who works here would now be in control of the UK government. So this could be better than unrestricted access to workers of all types.
Overall, the consensus view of economists suggests that EU membership is positive for the UK economy, but there are considerable uncertainties, especially over the long run.
So, what’s the answer?
Taking all these factors together, there seems to be evidence that EU membership provides benefits to UK investors. However, none of the areas is clear-cut, and the pros and cons for individual investors will be affected by a wider range of factors. As ever, the best approach is to be clear on your goals, to take a long-term view and ensure that your portfolio is well-diversified.
Peter Westaway, chief economist at Vanguard