21 Jun

Brexit facts by Brian Parker, Chief Economist, Sunsuper

On June 23 2016, the UK holds its referendum on the country’s continued membership of the European Union (EU). Given that every debate needs its slogans, abbreviations or acronyms, voters will choose between remaining in the EU (Bremain) and leaving the EU (Brexit). In recent weeks, financial markets have become increasingly unsettled by signs that the British public might vote to leave the EU. Opinion polls have begun to show previously undecided voters moving into the Brexit camp.

Why does it matter?
The EU has arguably been a force for good in the world, in terms of maintaining peace, promoting democracy and boosting trade. However, the EU has faced increasing strains in recent years, not just the stresses on the euro, but more recently the challenges posed by the European immigration and refugee crisis. Across much of Europe, voters are increasingly expressing a desire to break free of the EU, even in countries such as France and the Netherlands. Anti-EU parties are on the rise politically.

An exit vote by the UK, the second largest contributor to the EU’s budget, and a major world economy in its own right, is likely to add to the strains facing the EU and give a further boost to anti-EU parties across the continent.

What is likely to happen?
The short answer is that no one has any idea which way the referendum will go. The polls are too close and too variable to provide a definitive guide. A “poll of polls” published in the Financial Times shows a slight majority in favour of Brexit, but the margin is close, and more than 8 per cent remain undecided.

Even if the UK does vote in favour of leaving the EU, it is by no means clear when that is likely to occur, and under what circumstances. Under the terms of EU treaties, we could easily see the UK remain in the EU for some years.

How bad would a Brexit be for the UK economy?
There are a range of estimates of what a Brexit would mean for the future growth prospects of the UK economy. Most studies seem to conclude that as a result of a Brexit, the UK economy would end up being around 2 or 3 per cent smaller in a decade or two’s ime than it otherwise would be; the latest attempt by the UK Treasury at quantifying the impact puts it at around double that, while some studies (including some clearly pro-Brexit pieces) show that the UK would gain from a Brexit!

Quantifying the impact with any precision is pretty much impossible. As a rule of thumb, pro-Brexit analysis will tend to talk up the benefits of eliminating the onerous regulatory burden imposed from Brussels, and the greater trade opportunities with the rest of the world. Anti-Brexit analysis will focus on the loss of free trade access to the EU, and the potential damage to the City of London as a financial centre. Both sides are almost certainly “gilding the lily”. Britain already has plenty of trade outside of the EU – being in the EU seems to have been no impediment to trade with the rest of the world. If anything, EU trade in both goods and services has declined as a share of the UK economy in recent years, particularly as the European economy has struggled. Moreover, the UK may well be able to negotiate free or very close to free trade with the EU even if they do vote to leave.

What is Sunsuper doing?
Worries over a Brexit have risen, and this has contributed to falls in share prices across much of the world over recent weeks. A win by the Brexit camp in next week’s referendum is likely to increase market volatility in the short term. The UK pound is likely to be particularly vulnerable. At Sunsuper, we have put in place measures to reduce the impact on our exposures to the UK share market and the UK pound in the event of a Brexit vote being negative for those markets in the near term.

However, we do not believe that concerns over Brexit are a reason for anyone to alter their long-term investment strategy. A welldiversified portfolio of Australian and global investments – and yes, including investments in the UK – is still likely to deliver solid long-term real returns for members. The UK – either within or outside the EU – remains a major world economy in its own right. Its bond and share markets are some of the largest and most liquid in the world, and many of the companies listed on the London share market are large, globally diversified businesses and, consequently, are well-placed to produce long-term growth regardless of the referendum outcome next week.

If you want more information on your investments with Sunsuper, please give Sunsuper a call on 13 11 84.

Posted in General by Tim Curtin

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