On June 23, voters in the United Kingdom will decide whether to remain part of the European Union (EU) or withdraw from it. The possibility of a British EU exit—often shortened to “Brexit”—has caused considerable noise in the press. But what would it mean for investors?
For investors in the United Kingdom, the potential implications are significant. For those in the United States and other parts of the world, the effects would likely be comparatively minor, but they bear consideration nonetheless. Let’s take a look at three key factors.
- Economic growth
Economists have offered a range of estimates on Brexit’s economic ramifications; some are positive, but most are negative.
In terms of gross domestic product, the United Kingdom boasts the world’s fifth-largest economy, according to the World Bank. As of 2015, it ranked seventh among the United States’ trading partners, with $114 billion in total trade, according to the Commerce Department.
Post-Brexit, the United Kingdom would lose the favorable trade tariffs that EU membership bestows. And inward flows of investment by firms—for example those wanting to establish a U.K. presence to access the lucrative British market—might be discouraged. There might also be a negative impact from restrictions on the number of EU citizens coming to work in the United Kingdom, something that has boosted the U.K. economy and tax revenues in recent years.
The argument that Brexit would increase U.K. GDP assumes that its trade outside the EU (particularly with Commonwealth countries such as Canada) could increase, even though such trading opportunities already exist. The anti-EU camp also argues that removing what they see as burdensome EU regulations would allow stronger economic growth. But the United Kingdom is already one of the least regulated economies in the EU. What’s more, many EU regulations were actually initiated or supported by the U.K. government. In some cases, the United Kingdom government has introduced rules over and above those that apply elsewhere in the EU.
Finally, on immigration, it would still be possible for EU citizens to live and work in the United Kingdom post-Brexit, but the choice of who can do so would be up to the U.K. government. On the whole, this could be an improvement over unrestricted access to workers of all types.
Overall, the consensus view of economists suggests that EU membership is positive for the U.K. economy, but there are considerable uncertainties, especially over the long run. And while an economic downturn in the United Kingdom wouldn’t carry the global weight of a downturn in, say, the United States or China, there could be ripple effects for countries around the world.
- Costs of doing business
For U.K. residents, Brexit would probably mean higher investment costs. U.K.-based asset managers would likely lose access to the “passporting” arrangements that currently allow them to distribute investment products into EU markets. This might compel them to set up additional offices in continental Europe, and it’s likely that the cost of doing so would be passed on to the end investor.
The alternative argument is that the costs of investing within the United Kingdom could fall because of the removal of regulatory costs imposed by the EU. So overall, the net effect is still probably an increase in cost, but admittedly the outlook isn’t completely clear.
- Market volatility and investor uncertainty
Speculation about the United Kingdom leaving the EU has already caused increased volatility in European and global markets, especially for assets denominated in British pounds. Some studies have suggested that Brexit could cause the pound to weaken further, perhaps by up to 20%. This might suggest that investors should avoid allocating assets to the United Kingdom. However, this possibility has already been “priced in” by the markets to some extent. And if Brexit doesn’t happen, sterling-denominated assets might end up representing good value.
The short-term impact, then, would be a degree of market volatility and disruption. But it’s difficult to predict how significant the impact would be for a long-term investor holding a well-diversified global portfolio.
So, what’s the answer?
Taking all these factors together, there seems to be evidence that EU membership provides benefits to investors in the United Kingdom. However, the pros and cons for individual investors are affected by a wider range of factors. It’s difficult, if not impossible, to say definitively that Brexit would ultimately be good or bad for the United Kingdom. For the United States and other parts of the world, the implications are even less clear.
As always, Vanguard believes the best approach is to be clear on your investment goals, take a long-term view, and ensure that your portfolio is well-diversified.
- All investing is subject to risk, including the possible loss of the money you invest.
- Diversification does not ensure a profit or protect against a loss in a declining market.
- Foreign investing involves additional risks including currency fluctuations and political uncertainty.