In the run up to the UK’s referendum to retain EU membership on June 23, RBC Wealth Management gave its viewpoint on the affect of a Brexit on investor portfolios.

 

Go deeper with GlobalData

Data Insights

The gold standard of business intelligence.

Find out more

Economic contraction

Frédérique Carrier, Director, Head of Equities at RBC Wealth Management, said that there would likely be a contraction of between 2-4% of UK GDP over a two to three year period after exit.

"Contraction will happen for two reasons. One will be a slowdown in capital spending, and we’ve already seen that in economic numbers. CFOs are delaying investment decisions – they don’t know whether the UK will have access to the single market. So clearly, if you have to make investments, you have to know what the rules of the game will be before investing.

"The UK has a very wide current account deficit, 5.2% of GDP – it’s the widest deficit in the developed world. A lot of this current account deficit is financed by FDI, so if there are delays in FDI, if people invest less, we will need to see a weaker pound in order to readdress the balance.

How well do you really know your competitors?

Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.

Company Profile – free sample

Thank you!

Your download email will arrive shortly

Not ready to buy yet? Download a free sample

We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form

By GlobalData
Visit our Privacy Policy for more information about our services, how we may use, process and share your personal data, including information of your rights in respect of your personal data and how you can unsubscribe from future marketing communications. Our services are intended for corporate subscribers and you warrant that the email address submitted is your corporate email address.

"The second reason is because of lower exports. The UK is a large exporter to the EU, 51% of exports go there. The fact that the access has been unfettered has lead that growth. If there are restrictions, export growth could slow down and therefore impact economic growth."

 

Impact on equities

Carrier suggested that a vote to leave would promote considerable uncertainty around the UK’s status outside of the European Union, and thus would affect the equity market:

"We would expect that within the equity market, the risk premium for UK stocks to increase and valuations to fall. In this scenario, we believe that large cap stocks, which tend to be more international, would likely fair better than small cap stocks, which tend to be more domestically focussed."

 

Impact on fixed income

Carrier said: "Within the fixed income market, if the electorate decides to leave the UK we anticipate more volatility due to a tug of war between credit downgrades and foreign investors selling gilts on the one hand, and the Bank of England loosening monetary policy on the other."

 

Currency volatility

Paul Bowman, head of structured products and FX strategy at RBC Wealth management, said that there would be "heightened volatility of the pound" upon exit. He suggested that currency weakness would come within the first few months of an exit.

"If the UK votes to leave, the pound would likely weaken versus the US dollar. Conversely, if the vote is to remain we would expect a relief rally. "

Bowman added that a Brexit would have an impact on European financial markets and suggested that the Euro would weaken.