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Klingman Insights


June 15th, 2016

On June 23rd British citizens will vote to determine if their country will stay or leave the European Union. This process has often been referred to as "Brexit". Before diving headfirst into the "Brexit" vote and its potential implications, recall that the European Union (EU) is an economic and political union of 28 European states. The EU upholds common policies across the states on social and economic programs such as trade and immigration. Britain is a member of the EU, despite maintaining its own currency.

Economists, central banks and politicians around the world (including the Bank of England, the UK Treasury, and Britain's Prime Minister David Cameron) have warned Britain that they could be worse off economically outside the EU. However, it has become clear that the vote is much less about economics. Rather, people's voting interest seems to be more about sovereignty of the British citizens – specifically around control of their immigration and trade policies. We believe it is in Britain's best interest to stay in the EU, and we believe that is the probable outcome. However, recent polls indicate the vote could come right down to the wire. The Financial Times most recent poll on June 10th suggests 45% vote stay, 43% leave, and 12% remain undecided. The big swing factor will likely be the British youth, who generally support staying in the EU, but are less likely to actually vote. All of this uncertainty around the outcome has led to a significant increase in market volatility, and we expect more to come as we approach the vote. We saw somewhat of a similar situation last year when Scotland voted whether to break from the United Kingdom. Polls indicated a close vote, but the Scots comfortably voted to stay in the UK.

If the outcome of the vote is to stay in the EU, it will be business as usual and we would expect a relief rally in global asset prices, particularly in Europe. If the outcome is to leave the EU, Britain will embark on a two-year negotiation period with the EU about the terms of their divorce. The departure would increase the chances of a recession in both the UK and the EU in the coming years. It would also increase the chances that the remaining 27 states in the EU do not stay intact. Both most likely would be negative for markets in the short term. Stay tuned.

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