Source: Essex Continuous Monitoring Survey, What UK Thinks, YouGov, J.P. Morgan Asset Management. Essex Continuous Monitoring Survey data: 2004 to January 2015, YouGov data: February 2015-August 2015, average polls from YouGov, ICM, Survation and ComRes: September 2015-February 2016. Data as of 1 June 2016.
Even with a "remain" verdict, the uncertainty over Britain's long-term place in the EU is unlikely to be resolved if the campaign to leave the EU garners significantly more than 40%. In that case, there seems to us a strong chance of another referendum within 10-15 years, one which the pro-EU side may find more difficult to win if closer integration in the eurozone has made the EU less hospitable to the UK and/or popular concerns about immigration have not subsided.
It has been suggested that another referendum could happen after a vote to leave the EU, with voters in that second referendum, in effect, voting whether to accept the terms of Britain’s exit. This cannot be ruled out, though it is of the nature of these campaigns that before the vote, the pro-EU side must insist it is impossible. The larger point is that it is impossible to know what will happen after a vote to leave-or what the “deal” for Britain and its businesses would ultimately be.
Investors cannot hope to predict the exact shape of the post-Brexit landscape. They can, though, think about the macroeconomic and microeconomic considerations that would come into play in such a scenario. Here we consider both, after a brief summary of the economic and market implications of the fact that the vote is being held at all.
In recent statements and interviews, the governor of the Bank of England (BoE), Mark Carney, has reiterated that a possible Brexit vote poses the “biggest domestic risk” to the country’s economic outlook in the short and medium term.1 Though the currency has recovered recently, the exchange rate remains 5.6% lower on a trade-weighted basis than at the turn of the year.
As Exhibit 2 demonstrates, sterling has declined further than can be explained simply by the fall in UK rate expectations relative to the US since the end of the year. During the referendum campaign, the cost of insuring portfolios and business activities against further sterling weakness has spiked to the highest level since 2010 and derivative markets are forecasting that sterling volatility will remain high well into the summer.