- U.K. voters head to the polls June 23 to decide whether Britain will remain in the European Union (EU)
- Supporters of a departure say it will better serve Britain’s interests; opponents warn of lasting dire economic consequences
- For the 28-nation EU, a “leave” vote would be a negative event both economically and politically
In our view, several risks exist for U.K. stocks and European markets if what is known as “Brexit” wins approval from British voters.
The rising likelihood of a “leave” vote
While betting odds have consistently favored the “remain” camp, online and telephone polls suggest the British public is fairly evenly split on the referendum vote. However, two recent polls commissioned by The Guardian newspaper of London showed voters favoring leaving the EU by slim majorities.
While it is not our central case that the United Kingdom will leave the EU, the probability is higher than we are comfortable with. Increasingly, the immigration crisis in Europe and the terrorist attacks in Brussels in late March are fueling anti-EU sentiment among the British people, particularly older people who typically are more likely to turn out to vote.
Supporters of Brexit believe that a U.K. departure will better serve Britain’s national interests on sovereignty, fiscal issues, and immigration, while opponents argue that EU membership affords the country significant benefits, including unfettered access to the world’s largest trading bloc, benefits from labor mobility, and the influence afforded to members of a powerful economic and political club.
Deleterious effects on foreign investment, trade
I believe a withdrawal from the EU would depress economic growth in the United Kingdom in the short term and over time, with widespread negative effects on everything from the value of the pound sterling to demand for London real estate.
Many corporations have chosen the United Kingdom as their headquarters for conducting business throughout Europe. As these companies try to work out the implications of a departure, I believe we would see a substantial drop in foreign investment in the United Kingdom.
In a post-Brexit world, U.K. exports and imports also would likely be disrupted by the uncertainty around trade agreements. Given the negative effects on employment, overall consumption in the United Kingdom also would likely suffer.
A vulnerable EU also would feel pain
For the 28-nation EU, we believe a “leave” vote would be a negative event both economically and politically. A U.K. departure has the potential to start a broader process of disintegration within the trading bloc — generating further concerns about other countries exiting the EU.
For the EU, the loss of Britain — the EU’s second-largest economy — also would potentially weaken the union at a time when it is struggling with various issues, including sluggish economic growth and an ongoing refugee crisis.
Warnings from around the world of lasting economic damage
Meanwhile, the Organization for Economic Cooperation and Development (OECD) has joined the International Monetary Fund, the Bank of England, and even President Barack Obama in warning about the dire economic consequences of Brexit.
In a recent report, the OECD said departure from the EU would slash more than 3% from Britain’s gross domestic product by 2020, leaving the nation grappling with constrained financial conditions, diminished confidence, stiffer trade barriers, fewer skilled immigrants, and a lack of labor mobility.
For informational purposes only. Not an investment recommendation.
This material is provided for limited purposes. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Putnam product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice. The opinions expressed in this article represent the current, good-faith views of the author(s) at the time of publication. The views are provided for informational purposes only and are subject to change. This material does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. Investors should consult a financial advisor for advice suited to their individual financial needs. Putnam Investments cannot guarantee the accuracy or completeness of any statements or data contained in the article. Predictions, opinions, and other information contained in this article are subject to change. Any forward-looking statements speak only as of the date they are made, and Putnam assumes no duty to update them. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those anticipated. Past performance is not a guarantee of future results. As with any investment, there is a potential for profit as well as the possibility of loss.
Diversification does not guarantee a profit or ensure against loss. It is possible to lose money in a diversified portfolio.
Consider these risks before investing: International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Investments in small and/or midsize companies increase the risk of greater price fluctuations. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. You can lose money by investing in a mutual fund.
Putnam Retail Management.