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What Would Brexit Mean for Markets?

Sunil Swami, Chief Investment Officer | JUN 14, 2016

Markets Jittery Over Looming Vote

In a poll published late Friday June 10, the campaign for Britain to leave the European Union took a 10 percentage-point lead. The market, which had not priced such an event, began focusing its attention on the referendum to be held June 23. The pound and the stock market fell as a result and the weakness has continued into this week. Polling data is fairly unreliable and so we expect financial markets to be volatile and range-bound until the decision. Should Britain decide to leave the European Union, a steep sell-off particularly in European stock markets is very likely.

What Might Brexit Mean for Europe?

According to the Economist – “The impact of Brexit on British businesses, the UK economy and wider British interests would be severe and felt across multiple channels. Both the path and the endpoint, in terms of the new relationship between the UK and the rest of the EU, would be uncertain, compounding the costs to the UK. The direct impact on the rest of the EU would also be significant. The export, supply chain, investment and policy interests of many large corporates would be adversely affected but perhaps the single biggest impact will be on the cost of raising finance in Europe which is likely to increase. Brexit would have a wider political impact on the EU, both by disrupting internal political dynamics and because of the risk of political contagion if the ‘proof of concept’ of leaving the EU encourages disintegrative forces in other member states. Europe would also lose esteem and influence around the world.”

Illustrating the state of alert ahead of the June 23 referendum, the European Central Bank has publicly pledged to backstop financial markets if Britain leaves the EU, according to Reuters. The Bank of England has made a similar pledge. One senior ECB official, speaking on the condition of anonymity, told Reuters, "There will be a statement to do whatever it takes to maintain adequate market liquidity."

About the Author

Sunil Swami, Chief Investment Officer

Mr. Swami has decades of experience in the investment management and related fields.

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