Investors are playing a game of "wait and see" over Brexit fears

“WE have to recognise that the world is a more difficult place post-financial crisis. Even economists are struggling to come to terms with that,” said John Wyn-Evans at the Investec Wealth & Investment event in Sheffield last week.

Held at the Mercure Sheffield St Paul’s Hotel, a room of delegates heard that the UK faces a challenging world and, with its membership of the EU hanging in the balance, the country faces an even more uncertain future.

Mr Wyn-Evans, head of investment strategy at Investec Wealth & Investment said that recovery in the current cycle has been much shallower compared to the recessions of the 1930s through to the early 1990’s, in which the economy recovered faster. “We need more uncertainty like we need a hole in the head,” said

The fall in commodity prices and the slowdown of the Chinese economy have all contributed to a difficult period for the world and the UK, he said, and the Budget put clearly into focus the fact that the UK Government is once again pushing austerity measures.

The UK economy is already heavily dependent on the consumer and household spending, so with business investment also under pressure at the moment there is limited potential for higher demand.

Brexit fears meant investors were playing a game of “wait-and-see,” said Mr Wyn-Evans, and one of the knock-on effects of the calling of the referendum was a decline in investment from overseas, affecting our already fragile economy.

“We buy more than we sell,” he said of the UK, “we have a massive deficit in goods and a surplus in services.” This is one of the factors putting pressure on the pound.

Predictions for what a UK outside Europe would look like are varied, with research from the Treasury and the London School of Economics predicting a negative effect on UK GDP. Economist Tim Congdon’s research for UKIP found that the effects would be positive. “So no surprises there,” Mr Wyn-Evans said.

“It would mean lower contributions to the EU, which currently stand at between £8bn and £10bn a year. Though in the context of the wider UK economy, this wouldn’t be a game changer,” he said.

Estimates that compliance with EU regulations cost as much as 5% of GDP should be taken into account, he said, but also the fact that regulations are there to help us, and may be replaced by British regulations anyway.

The loss of ‘passporting’ rights enabling UK-based banks to trade not only in the City of London but also elsewhere in the EU has been vital in the development of financial services here and the retraction of membership will be a huge blow to the sector.

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Renegotiating trade agreements would be an option, but following President Obama’s declaration that an independent UK would be “at the back of the queue” for agreements with the US, and the fact that the Canadian trade agreement took 7 years to thrash out – and it still hasn’t been ratified by all 28 current EU members – make this a difficult position to defend.

“Both Switzerland and Norway [non-EU members with trade agreements] have to comply with trade area rules, open their borders and, in Norway’s case, pay into the EU,” he said.
Changeability in the electorate as well as emotional arguments make the EU Referendum on June 23 a difficult one to call, he said. The possibility of a Brexit, as measured by bookmakers, increased 3% to 34% following the Brussels attacks, with fears around immigration driving the change.

The biggest risk is that we leave the EU and decide it wasn’t the correct decision. “If it all goes wrong,” he said, “there is no chance we’d have another referendum, and even if we did what is the likelihood of the remaining countries allowing us back in?”