UK referendum: Blame the weather, not Brussels

The outcome of today’s crucial UK referendum on EU membership will partly depend on how many of the 46.5 million registered voters cast their postal votes and turn up today at voting booths which opened at 07.00 (UK time) and will close at 22:00.

Opinions polls have concluded that a lower voter turnout today would favour the Leave vote while a higher turnout would favour the Remain vote.

But intentions to vote are not the same as actually ticking the ballot box. Bad weather is more likely to keep people at home and turnout low, favouring the Leave vote while dry weather would in theory encourage people to vote, in turn favouring the Remain camp.

There have so far today been scattered showers across the UK and the Met Office has issued an amber weather warning for the East of England, London and South-East England, with predictions of thundery showers throughout the day.

However, the Financial Times is reporting that in many parts of London there are long queues at several polling stations and the Met Office is forecasting largely dry and cloudy weather elsewhere in the UK.

It is somewhat ironic that the unpredictable British weather, a favourite topic of conversation, could potentially change the British economic landscape for years to come.

The consensus expectation is that if the UK votes to remain in the EU, sterling, UK equities and to an extent the euro and global equities will rally sharply. But this rally could start to fade after a few days, as markets refocus on global data and events and the British turn their attention to the all-important matter of the Euro 2016 championships and perennial question of whether Andy Murray can win a second Wimbledon title.

But acute uncertainty and market volatility would likely persist for weeks and potentially months should the leave camp win today’s referendum, particularly if it wins by only a very narrow margin and/or turnout is low.

Read the full article on my website.

Europe: The Final Countdown

On Thursday 23rd June, the British electorate will hold arguably the most important vote in a generation, with the result of the UK referendum on EU membership due to be announced on Friday.

The latest opinion polls have the remain camp slightly ahead and bookmakers attribute a 75% probability of the UK voting to stay in the EU. But caution is warranted as opinion polls have swung back and forth in recent weeks. Turnout, and therefore the weather, may be a critical factor with a high turnout likely to favour the leave vote.

I am nevertheless sticking to my long-held view that the British electorate will vote for continuity and for the UK remain in the EU.

The popular assumption is that after the referendum UK markets and global risk appetite will move in clear directions. This belief is likely to be tested, particularly if the British electorate votes in favour of brexit as the government is not legally bound to the referendum result.

Specifically, the consensus expectation – which I share to a degree – is that if the UK votes to remain in the EU, sterling, UK equities and to an extent the euro and global equities will rally sharply. But this rally could start to fade after a few days, with “business-as-usual” resuming.

Conversely, the over-riding view is that sterling and global risk appetite will weaken, potentially very sharply, in the days following a vote for the UK to leave the EU.

Importantly I see six potential sources of uncertainty and a number of possible scenarios, particularly if the leave camp wins by only a very narrow margin and/or turnout is low. Market volatility could thus persist for weeks and potentially months, keeping sterling and UK equities on the back foot:

Prime Minister Cameron’s future;
The risk of the British government ignoring the referendum result;
The risk of the British parliament ignoring the referendum vote, the government re-negotiating a deal on the UK’s membership to the EU and holding another referendum;
The risk of a second Scottish independence referendum;
The risk of a protracted UK exit from the EU leaving the door open to a decision reversal; and
The re-negotiation of new trade treaties.

Read the full article on my website.

EU REFERENDUM SURVEY RESULTS

75% of 130 analysts, consultants, journalists, finance specialists, real-sector heads, policy-makers and portfolio managers forecast that the UK electorate will vote in favour of the UK remaining in the European Union (EU) in the 23rd June referendum, in a survey which I conducted between the 10th and 16th May. That ratio jumps to 81% when the 10 respondents who did not have a view are excluded.

By comparison, the latest poll-of-polls conducted by What UK Thinks has the “remain” vote on 52% and “leave” vote on 48% five weeks before this crucial vote. But caution is warranted given the large share of undecided voters, the importance of turnout and differing results depending on whether polls are by phone or on-line. Current prices offered by betting companies suggest a comfortable victory for the “remain” vote.

Of the 130 respondents with a view which I surveyed, 65% forecast that the UK leaving the EU would be negative for the British economy medium-term. 19% forecast that it would be positive and 15% that it would be neutral. This is broadly in line with the view expressed by Prime Minister Cameron and “remain” camp, the Bank of England and IMF.

The risk to the currency is forecast to be somewhat asymmetric. There is an overwhelming view amongst those surveyed that, if the UK leaves the EU, sterling will depreciate while 38% forecast sterling to depreciate or remain stable should the UK remain in the EU.

Specifically, out of 131 respondents, 81% forecast that if the electorate votes for the UK to leave the EU, sterling would depreciate between the referendum and end-year against the currencies of the UK’s key competitors. Only 8% forecast that sterling would appreciate, while 6% thought that the currency would be broadly stable. 6% did not express a view.

But out of 127 respondents, only 54% forecast that if the UK remains in the EU sterling would appreciate. 11% forecast that sterling would depreciate, while 27% thought the currency would be broadly stable. 8% did not express a view.

These survey results tend to back my view, expressed in What to expect in 2016 – same, same but worse, that the electorate will vote for the UK to remain in the EU and that the lifting of this uncertainty will see a reasonably competitive sterling appreciate.

But any currency rally is likely to be moderate given the UK’s structural deficiencies, including a large current account deficit, low productivity and weak wage growth, and a dovish central bank. A “remain” vote will not address these vulnerabilities near-term.

Read the full article on my blog.