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Brace yourself for Brexit

“If I were British and I had a vote on the 23 June, I would be tempted to vote for Brexit, just to give a bloody nose to all those smug people in Brussels, and to David Cameron,” former Greek finance minister Yanis Varoufakis admitted recently at Expert Investor’s Pan-European Congress in Rome.

Varoufakis is not the only one who has a reason to favour Brexit. While personal rancour may play a role for Varoufakis, some have accused the leading political face of the Leave campaign, former London mayor Boris Johnson, of merely backing Brexit to increase his chances of succeeding David Cameron as prime minister.

Others, including a number of high-profile City professionals such as Hargreaves Lansdown founder Peter Hargreaves, Newton Investment Management CEO Helena Morrisey and FundSmith CEO Terry Smith, are more long-standing advocates of a UK exit from the EU.

Splendid isolation

Smith, who stood for parliament in 1997 on behalf of the Referendum Party, which had as its main aim to push the government to commit to a referendum on British EU membership, said in a recent interview that he believes the UK will have a better future outside of the EU.

“I think most of the arguments for staying in the EU are either facile, as in ‘I will have to queue up more at immigration to go on holiday’ or they are based on fear, as in ‘if we leave, we won’t be able to trade with Europe on the same terms’. I think this is utter garbage, frankly. We are the fifth-largest economy in the world.”

Smith admits that, while the UK will be “absolutely fine” in the long term, there will be “an awful lot of worry and disruption” if the country votes to leave.

Project fear?

Much of the debate centres on the long-term impact of the decision, as it seems everyone is in agreement that, in the short term, disruption should be expected. Indeed, the prospect of Brexit has already had a real impact, even though the consensus expectation in the investment management community is that it is not likely to happen.

Five international asset managers gave EI their odds on Brexit, varying between 25% and 35%, which corresponds with the estimations of betting agencies such as Betfair and William Hill.

While Brexiteers such as Smith expect a ‘Leave vote’ not to have any major negative consequences from an economic point of view in the long term, financial markets seem to make a different assessment, believing UK assets will be hit the hardest. Sterling is on its weakest run since the global financial crisis in 2009, having shed more than 13% of its value against the euro, and over 7% against the dollar, in the past five months.

The much-debated (at least in Britain) Treasury report on the economic consequences of Brexit suggests it would be severely damaging to the UK economy in the long term, with the impact on GDP ranging from -3.8% to -7.5% depending on the kind of trade agreement the UK would strike with the remaining 27 EU members. Other studies are hardly less gloomy: Societé Générale said in a recent report that were Brexit to happen, “there could be a hit to exports averaging 2.5% pa for 10 years.”

Part of the Bonhill Group.