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Brexit - Referendum for the British Public

The British do have a healthy sense of humour. In March of this year, a UK government science agency enlisted the public’s help in christening a new $300 million state-of-the-art polar research vessel. In an online forum, citizens were asked to submit and vote on ‘inspirational’ names, gallant monikers like ‘Shackelton’ or ‘Endeavour’. When the polls closed on April 16, the public had not disappointed in its response. The winning name chosen in a virtual landslide was ‘RRS Boaty McBoatface’.


However, the vote to stay or leave the European Union is a very serious one for the British public, with significant consequences. A decision that can be taken lightly.


Tomorrow, UK voters will be asked “Should the United Kingdom remain a member of the European Union or leave the European Union?” Since early February, when the date for the referendum was initially set, the majority of British voters have indicated a preference for staying in the EU. In recent weeks, however, we have noticed a marked change in momentum, with the ‘leave’ camp gaining meaningful traction. Markets, which had up until this point been somewhat complacent about a ‘stay’ vote, have moved accordingly.


Why the Erratic Polling Numbers?


It is significant to note that this is not a vote down traditional party lines. The Conservative Party in England is largely divided on the issue, while as much as a third of Labour Party voters are expected to vote ‘leave’. In addition, the referendum is being put to the entire nation, and so the entire United Kingdom becomes a single geographic voting area, as opposed to 650 separate constituencies. Making predictions without the luxury of being able to measure small geographic strongholds that would historically always go to one party or the other becomes quite difficult.


While the consensus still anticipates a ‘remain’ vote, the end result is very much in question. The one-way tide that ‘stay’ had enjoyed for most of the spring has been shaken over the last several weeks. I anticipate the vote will be very close and hence difficult to predict. The markets, not just in the United Kingdom but also in Europe and the United States, are waking to that reality.


Outcomes


In the case of an exit from the EU, we anticipate the pound will likely depreciate substantially. The pound has already become more volatile versus the US dollar and euro as the margin between the projected ‘leave’ and ‘stay’ vote appears to have narrowed.


The pound’s depreciation would likely raise the cost of imports and could lead to higher inflation. Additionally, a ‘stay’ vote may lead to more foreign direct investment in the United Kingdom, which is currently muted due to the political uncertainty. The increase in foreign direct investment could boost economic activity, which would also put upward pressure on inflation.


Whatever the outcome of the referendum, this is clearly a meaningful and profound decision for voters, and one that will have long-term and substantial implications for the British economy, social structure and geopolitical sphere of influence. Certainly a weighty deliberation than picking the name of a boat.


(And, in case you were wondering, the British government has subsequently rejected the people’s choice for naming their new vessel, opting instead for the more traditionally staid ‘RRS Sir David Attenborough’. In a nod to the citizenry, however, a remotely operated miniature sub on the ship will be named “Boaty”.)


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