As UK voters make up their minds before an election on May 7, the issue that matters to financial markets is one that’s barely troubling them.
Opinion polls show a referendum on leaving the EU, a signature policy of the governing Conservative Party, is way down the priority list of an electorate more concerned with healthcare, immigration and economic recovery. Executives and investors say the prospect of an EU exit would hit confidence in stocks, bonds and the pound as well as push some companies to freeze spending.
“A referendum opens up uncertainty about the future of the UK economy and its relationship with Europe, which is potentially destabilising for investment,” John Stopford, head of fixed income at Investec Asset Management in London, said in an interview on Wednesday.
“Markets don’t like uncertain outcomes, and it would mean quite a lot of uncertainty,” he said.
Whether the UK opens the possibility of leaving the EU after more than four decades will be decided by the narrowest of margins and would reflect the country’s often ambivalent relationship with its European partners.
Prime minister David Cameron’s Conservatives and the opposition Labour Party are even in most polls. The make-up of the next government will likely depend on negotiations with smaller parties, including the Scottish nationalists who want to remain in the EU though leave the UK.
In a sign investors are expecting a close-run election, a gauge of the volatility of the pound over the next six months rose to a two-and-a-half-year high in February.
The cost of options to protect against a weaker pound relative to the dollar also reached the highest since June 2012. While the FTSE 100 Index climbed to another record on Thursday, traders are betting the relative calm won’t last. They’re paying the most in three years for options hedging against price swings in the next three months relative to one-month contracts, Bloomberg data show.
Societe Generale analysts said in a report this week that an exit from the EU might trigger a 20% decline in the FTSE 100 by the end of 2017.
The Open Europe research group’s “Brexit Barometer” [British exit] last month put the chances of the UK leaving the EU at 17%.
“It is a very big decision and one that will affect Britain in more ways than many can imagine,” Jean-Marc Gales, chief executive of sports car manufacturer Group Lotus, said of the potential referendum. Cars, for example, are subject to European standards, he said.
“Would Britain be able to valuably contribute to legislation, design, innovation and technology for cars in the future if it doesn’t have a seat at the table?”
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