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Market fears surface as UK mulls ‘Brexit’

Market fears surface as UK mulls ‘Brexit’

If the UK votes to leave the European Union on 23 June, the implications could include “a wave of exits” across Europe, according to one international fund manager.

In an article – Brexit unlikely, but what if? – Robeco Investment Solutions argued that although there are numerous “uncertainties” related to a Brexit, the potential for further exits would exist.

Robeco Investment Solutions' chief investment officer and report author, Lukas Daalder, said: “For Europe the biggest uncertainty is linked to potential speculation on the further disintegration of the eurozone itself."

The cost of a Brexit, he said, will also be linked to the way financial markets are able to cope with uncertainties. Mr Daalder said that although the euro will likely strengthen against the pound, it will weaken against the US dollar.

If the pound depreciates strongly, Mr Daalder said, the impact on inflation will be significant, with it possibly reaching the 5 per cent mark.

“The big question in such a scenario will be whether the Bank of England is willing to let this run its course, or will they feel the need to hike rates,” he said.

In the context of a depreciating currency, financial markets will be hard hit. UK stocks, Mr Daalder said, will likely enter a volatile trading environment as a result.

“This is the short-term outcome, with the pound as the main variable to keep an eye on; the more muted the response in the FX markets, the less extreme the ripple effect on the economy and other financial markets,” he said.

While there are numerous uncertainties surrounding a Brexit, however, Mr Daalder maintained that the chances remain slim.

The Netherlands-based asset manager currently puts the odds of a Brexit at 25 per cent.

"Many British citizens feel limited affection for the EU, but faced with the greater uncertainties surrounding a Brexit, when push comes to shove, we expect the majority to choose to maintain the status quo," Mr Daalder said.

 

Market fears surface as UK mulls ‘Brexit’
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