Brexit: Big risk,
little reward

Mar 2, 2016

UK referendum on Europe

UK voters will decide in June if the country will stay in the European Union (EU) or exit the bloc. The upcoming referendum represents a critical juncture for the UK and EU alike, and comes at a time when the global outlook is clouded by unusual uncertainty.


What are the key economic, financial and political risks of a British exit, or Brexit? Our latest publication provides a roadmap, drawing on the views of BlackRock’s investment professionals and public policy experts. The graphics below highlight the extent of economic ties between the UK and EU.

Relative strength

Selected UK and EU metrics, 2013-2016

Chart: Selected UK and EU metrics, 2013-2016

Sources: BlackRock Investment Institute, Confederation of British Industry, Bank of England, European Commission, MSCI, UK Trade and Investment, IMF and World Bank, February 2016. Notes: GDP, fiscal balance and government debt data are based on IMF forecasts for 2016. Equity market data are based on weights at the end of January 2016. Tea consumption data are for 2013. All other data are for 2014. The financial services share of EU activity is based on gross value added.

Key highlights

  • Our bottom line from an investment perspective: a Brexit offers a lot of risk with little obvious reward. Leaving the EU would lead to lower UK growth and investment - and higher unemployment and inflation. Any offsetting benefits appear less certain.
  • A newly independent UK would likely have reduced leverage to fashion trade deals for the crucial services sector and less clout to negotiate regulatory standards for unimpeded EU market access. These would be lengthy and painful processes.
  • The EU would lose a major budget contributor, a leading voice for free markets and easy access to a world-class financial hub. A Brexit could embolden populist parties across the continent, but we do not see a EU breakup as a result.
  • We see volatility in UK and European assets rising ahead of the vote. An actual Brexit would hit global risk assets, we believe, while a vote to stay would reassure markets.
  • Sterling is most vulnerable to Brexit fears as it is the most liquid UK financial asset. A Brexit could pressure the UK’s twin deficits, potentially triggering credit downgrades.
  • A leave vote would likely increase gilt yields. We could see bank funding costs rise and credit spreads widen. The Bank of England would likely cut rates in such a scenario or revive quantitative easing, looking past any temporary rise in inflation, we believe.
  • We could see a Brexit dealing a blow to domestically exposed UK equities, and would expect large cap overseas earners to outperform as sterling falls. A leave vote also poses risks to the London property market and to London’s role as a global financial center.

This material is part of a series prepared by the BlackRock Investment Institute and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of February 2016 and may change as subsequent conditions vary. The information and opinions contained in this paper are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This paper may contain ‘forward-looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this paper is at the sole discretion of the reader. Past performance is no guarantee of future results.


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