Fasten your seat belts . . .

This is not a political column. It is about money. But currently, whenever I open a newspaper, turn on a radio or the TV, or browse the internet, pretty much all I see or hear is  about whether or not the UK remains in the European Union. As a result, I will comment on the potential effects of Britain leaving or staying in the EU, specifically relating to the monetary aspects and investments.

I tend not to listen to politicians, those with a personal agenda,  or what my late Father would have called “greasy-pole merchants”. I don’t want opinions from the uninformed or prejudiced. I would rather hear the comments of those who know what they are talking about and can speak with authority  on the matter. I think it is fair to say that no-one can say with any true authority exactly what will happen in the long term. Without the benefit of crystal balls we have no idea what the future holds: this includes financial forecasters and commentators!

However, in the shorter term, it is fair to say that financial markets like what they know. The unknown is not their friend, and the potential years of uncertainty will be very likely to have an adverse effect, both on the UK stock market and the currency. This could be seen as a benefit over the long term, as a buying opportunity while prices are low. Inevitably, share prices would rise again (although, the UK financial cycle may be put out of phase with other world markets due to the financial upheaval). Should the currency weaken then the credit rating of UK plc is very likely to weaken, thus increasing the cost of borrowing. If the referendum result is for the UK to leave and consequently the value of Sterling falls, this would have the effect of making our exports cheaper (and therefore more competitive) and imports more expensive, with the probable effect of increasing inflation. This might be countered to some extent by an increase in interest rates, but any increase would tend to have an adverse effect on the value of Gilts, and similar fixed-interest securities. The overall effect on the share values of UK companies would again be difficult to see over the longer term, but initially those dealing predominantly with EU countries would be very likely to fall. A recent survey of Footsie 100 companies showed about three quarters of them in favour of remaining in the EU; it appears that the smaller the business, the more likely they are to be in favour of leaving, but, clearly, there will be opinions on both sides.

One of the major financial arguments for an exit is not having to make the current contributions to the EU budget. This is, on the face of it, a clear benefit. The concern is whether this would be offset by a consequent loss of trade. EU companies will still want to trade with the UK but, inevitably, trade tariffs (import duties) will have some effect on the cost of such trade.

Irrespective of the outcome of the vote, the world will continue to spin and life will go on. But it may be a rocky road for some while, and if anyone is seriously concerned about the potential risk to their equity investments, and may need access to their capital in the short term, then if they think it is very likely that a vote to leave will be the outcome, then it could well be better for them to move some funds into a safer environment.

Right ho, I’ve gone on for long enough now, I’m off to have a nice glass of Rioja, while it’s still cheap!

David Foot


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