por admin » Jue Jun 23, 2016 8:02 am
Effects of ‘Brexit’ Vote to Span Markets, Politics
The ramifications of the U.K.’s referendum Thursday on European Union membership will spill through Britain’s politics, Europe’s brittle economy and the world’s restive financial markets.
A frenzy of recent polls has ping-ponged a tiny lead between the Remain and Leave camps—two points here, three points there, a point here. The last volley of polls Wednesday gave a mixed verdict—some for Leave but one with an eight-point edge for Remain. Betting markets, bookies and traders still lean toward Remain.
A Remain vote would, in most respects, be a return to the status quo: Britain, one of the strongest European economies, would be unburdened by uncertainty about its long-term future. Prime Minister David Cameron would carry on for a term that lasts four more years. Financial markets would return to focusing on the pace of interest-rate rises in the U.S., growth in China and the price of oil. With investors now holding lots of cash, it could just be the dose of confidence needed to lift U.S. stocks.
The United Kingdom's exit from the European Union would mark a reversal in the global trend toward greater economic integration. WSJ's chief economics columnist Greg Ip explains that the major impact may be slower global growth over the long term. Photo: AP
Advertisement
The Leave camp believes an exit would benefit Britain in the long term. But investors, economists and analysts say in the short term it would take the world’s stocks, bonds and currencies—especially the British pound—on a wild ride. They are braced for changes to the price of gold, to the Swiss franc, to Japanese monetary policy.
“It may be a decision that is being made by folks locally to determine their future…but it has an impact on the rest of the world,” said Tom Manning, chief executive at F.L. Putnam Investment Management.
While the magnitude of the market reaction is uncertain, the direction appears clear: If Britain votes to leave, investors will rush to safety and precipitate a steep move in global markets on Friday from risky assets to havens.
Foreign-exchange providers and money-transfer shops are limiting transactions—or even suspending them—around the time the referendum results come out. Moneycorp, a British currency firm, says it will turn off its online operation Thursday evening and not bring it back until Friday.
“I’d consider it a shock event,” said Michael Thompson, managing director and chairman at S&P Investment Advisory Services, as “people look for the most stable ladders.”
The long-term consequences are hard to gauge. Advocates of a British exit, known as “Brexit,” say Britain would be revitalized by the ability to chart its own economic and regulatory course. While the 28-nation European Union is an economic powerhouse, Britain alone is no slouch, and plenty of countries thrive outside the bloc.
But interviews with dozens of global investors suggest last week’s volatile market action could offer a taste of what could come in the short term if Britain votes to leave—a 5% to 10% drop in global stock markets and steep losses for the pound.
An exit vote would also toss British politics into near-immediate mayhem. Mr. Cameron has campaigned against an exit for months, and while he says he will stay on if his country chooses one, many analysts say his position would be untenable.
Practically, he could resign or be removed as party leader by his own lawmakers in a no-confidence vote. That would trigger a bitter contest to replace him—a process that would take months. Mr. Cameron could stay on until a new leader is chosen. There might even be a new general election: British law prescribes one every five years, and the next is due in 2020. But a supermajority of Parliament could force one sooner.
Against the backdrop of politics, the epicenter of the market reaction on Friday will be the pound, which analysts forecast would fall sharply against the dollar.
But European stock markets stand to lose as much, investors say. UBS Group AG and Deutsche Bank AG this week forecast double-digit losses for European equities in the short term on an out vote.
Investors are particularly concerned about countries such as Ireland, a large U.K. trading partner, and the fragile economies of Spain, Portugal and Italy.
“When people first started talking about this, it was parochial discussion about how will this affect the U.K., but increasingly people are realizing that this could have very serious and important ramifications for Europe,” said Peter Westaway, an economist at Vanguard Asset Management.
While some investors expect the initial shock reaction to be short-lived, others think it could trigger longer-term losses if it emboldens euroskeptic groups across the Continent, or punctures a delicate global recovery.
You could have “Europe a la carte,” where remaining EU countries ask for advantages that hamper policies to promote growth and trade, said Philippe Ithurbide, global head of research at Amundi, Europe’s largest asset manager.
Investors have already sold European equity funds for 19 straight weeks ahead of the vote, according to data from EPFR Global. Surveys by Bank of America and asset manager GAM have suggested that investors see the prospect of a Brexit as the greatest potential risk to markets this year.
Activity and volume in options markets suggest institutional investors are hedging against a fall in the S&P 500. This month, investors have been buying an increasing proportion of put options—which grant the right to sell an underlying stock at a specific price by a certain time—compared to call options, according to Randy Frederick, director of trading and derivatives at Schwab Center for Financial Research in Austin, Texas. “When you look at all the considerations, the potential is big and uncertainty is high,” he said.
Companies in the S&P 500 derive roughly 2.9% of revenues from the U.K., according to data from FactSet, trailing only the U.S. and China.
The bigger effect on U.S. stocks is likely to come from a return of so-called risk-off trading across the world’s financial markets. That could send investors out of stocks and back into gold, the yen and U.S. Treasury bonds, which tend to gain in times of market stress. “It’s pure sentiment,” said Tina Byles Williams, chief investment officer at FIS Group. “You have low growth and tepid earnings, so those sentiment changes have an outsize impact.”
If the U.K. does vote to exit and the dollar strengthens, it could weigh on emerging markets with dollar-denominated debt and hinder the nascent recovery in commodity prices, tightening financial conditions just as the U.S. Federal Reserve is seeking to raise interest rates. Still, central bankers have said they are ready to step in with currency swaps and other tools.
And many investors say they will be looking at the short-term selloff as a chance to buy, because the long-term impact on corporate profits and the global economy remains in question.
—Jenny Gross and Georgi Kantchev contributed to this article.