In a few hours’ time, we should know the results of the referendum as to whether Britain is out or is to remain as a member of the European Union (EU). Ranked as the world 5th largest economy behind US, China, Japan, Germany, and with a GDP of nearly US$3.0 trillion, the results of the polls will have significant impact on the financial markets directly or indirectly. Although I am of the view that final results is for Britain to remain in the EU, there could be unpleasant surprises in view of how divided the parliament is on this issue. Furthermore, Britain, which is part of United Kingdom, in many ways are ‘more different’ than most countries in continental Europe. They continue to use the sterling pounds and, historically, they have been driving on the right side (I mean to say ‘correct’ side of the road as we have adopted the British’s traffic system here.), just to name one or two examples.
As one of the world’s largest economy and with London being one of the most important financial centres in the world, this referendum is closely watched by many countries on both sides of the Atlantic.
What really can be the impact on us? First and foremost, it is the world currency. If Britain chooses to leave EU, then the first direct hit is the British pounds. Being one of the major currencies in the world, its depreciation would mean appreciation in other major currencies such as US Dollars and the Japanese Yens. While, the past several months had seen the British pounds depreciated against many major currencies, the current state may not have priced in a full-scale BREXIT because the Brits were still quite divided over this major decision. Certainly, with a rather stagnated global economy, no country would want their currency to appreciate significantly. In fact, the Brexit had been quoted as a key reason for the chair of FED, Janet Yellen, to delay the decision to hike up the interest rate as it may result in a huge appreciation of the USD. In a similar way, an appreciation of Japanese Yens could negate years of effort by the Japanese government to export its way out of recession.
The other impact is the contagion effect. It may become a precedent for other EU economies, in particular the weaker ones such as PIGS (Portugal, Italy, Greece and Spain), to call for referendum to choose between ‘ín’ or ‘out’. Even within the United Kingdom (UK), Brexit could cause disarray between the countries in UK. Ireland belongs to the EU but depends on Britain to enable labour and goods movement in the enlarged market. With the high-growth rate in the recent years, Brexit will certainly have impact on the economic growth on this much smaller economy.
Being the second largest economy in Europe, Britain would be a more than welcome to join EU as a member. In similar way, Britain is also very dependent on continental Europe for trade and services as an enlarged market. Brexit could weaken the EU as an economic bloc, and possibly, on its own, sabotage its cutting edge areas such as banking, finances and trade services in serving the common market in the EU. In summary, Britain needs the EU just as the EU needs Britain.
At business level, the impact of Brexit is less apparent. It is likely that those companies who are exposed to the British pounds are more at risk. City Development, which operates hospitality services, and Comfort Delgro, which operates the bus services in England are more likely to be affected due to the currency movement. There are perhaps several more companies affected, but the situation should be relatively contained. However, the negative sentiments will still prevail if Brexit becomes a reality at least for the start. If Brexit degenerates into more referendums being held by member countries in the EU, then it is likely to throw more uncertainties for the stock market.
Keep our fingers crossed, guys!
Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.