If the United Kingdom votes to leave the EU tomorrow, it will lead to a global shock that could spark significant volatility across risk assets.
The pro-Brexit rhetoric has argued that an exit from the EU would allow the UK to regain autonomy and focus on its own local troubles; these include immigration and security policies that could help to save millions of pounds. It could even lead to a short-term market sell-off, which could be a good buying opportunity for others. Negative impacts on the mutual funds sector could be short term, too.
However, opponents of a Brexit argue that membership benefits of the EU and access to the common market outweigh many of the problems that come with membership.
The UK is the largest financial centre in the European Union and every day The City of London attracts a wide range of global banks and investors across asset classes and strategies. Therefore Brexit would lead to a lasting impact not just on the UK but on other EU members. Several key regulatory and legal issues would need to be considered for a firm to assess their potential impact – for example, on banking firms that use the “passport system” to access other EU countries. If the system lapses, as a result of Brexit, entire business models and operational structures may have to be changed.
The Leave rhetoric continues to state that EU membership is now a threat to London’s affluence. The idea that London would flourish post-Brexit goes against the many warnings from US investment banks and the Bank of England itself, among others. Many financial establishments have warned that Brexit would drain London of its wealth, topple the pound, undermine the world’s fifth-largest economy and push traders to move their businesses to alternative global financial centres. However, for international investors, the decline in the pound would benefit countries translating earnings from overseas back into the pound as exports, goods and services would be cheaper.
Membership of the EU provides British businesses their much-needed access to the European single market. Brexit could potentially increase UK-EU trade costs as well as exclude the UK from any deeper integration (such as the planned Transatlantic Trade and Investment Partnership with the United States). This could spur a plunge in business and consumer confidence and the UK’s financial sector could suffer greatly.
London has long been a popular investment destination but half of those investments into the UK come from the EU. Still, a significant chunk of investment also trickles down from China, the US and the Middle East.
Middle East investors have continued to buy property in the UK despite fears about its future in the EU, albeit it at a lower rate. The majority of the Middle East property investors would prefer the UK to remain in the EU and many have also said a decision to leave would negatively impact their investment strategies.
As most Middle East currencies are pegged to the US dollar, a weakening euro and pound has shaped beneficial investment opportunities for investors. In addition, slowing growth figures in the UAE, with GDP foreseen at 2.6 per cent this year, from 3.2 per cent in 2015 and 4.2 per cent in 2014, and a budget deficit expected to hit 7.5 per cent in 2016, means wealthy individuals will be encouraged to look overseas for investment opportunities.
Brexit has the potential to impact the Middle East’s real estate, travel and banking sectors, among others. Investors are taking a cautious approach to the UK until after the vote and no doubt will continue to be wary in the months following. A Brexit would weaken London’s role as an international financial centre as it would lose its current ability to access European markets.
Therefore Brexit could also be damaging to the UK’s international investments and it could lose credibility globally.
Mihir Kapadia is the chief executive of Sun Global Investments in London.
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