AXA IM: Vigilando el ‘Brexit’

Redacción - Domingo, 01 de Mayo

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Brexit update 

Expectation of Brexit cost swaying the polls?

 

As the UK’s Brexit referendum comes closer, phone polls continue to suggest a 10% point margin to remain in the EU, following a dip after the Belgian terror attacks. David Page looks at the latest polls and briefly reviews the recently published long-term impact assessments from the UK Treasury and the OECD, which were both consistent with AXA IM Research’s own assessment.  

Brexit update Expectation of Brexit cost swaying the polls? With the referendum still two months away, the Brexit debate appears to be establishing lines of demarcation. Her Majesty (HM) Treasury and the OECD1 published comprehensive assessments of the costs associated with exit. These estimated GDP would be 4.6-7.8% and 2.7-7.7% (respectively) lower outside of the EU by 2030 relative to remaining in, similar to our own 2-7% assessment. Moreover, recent interventions by US President Obama contradicted some of the ‘Leave’ campaign’s more optimistic exit assumptions. Betting markets reported significant movement in favour of the remain camp in the days after Obama’s comments, but initial polls have shown little reaction. Polls to see an Obama effect? Polling data has continued to be mixed. Large online survey polls continue to show an outcome within margins of error. Since March, phone polls that have provided a consistently greater lead for the remain camp, saw a softening. The publication of these polls coincided with the Brussels terror events, although initial surveys were conducted in the days before the attack. It is possible that the attacks accounted for the persistence of the weaker remain vote (the net move was made up of a dip in those voting to remain in the EU against a broadly stable vote for those wanting to leave. Numbers citing “don’t know” rose). We await comprehensive poll reaction to the Treasury’s economic assessment and President Obama’s intervention. Initial polls, both phone and online, have shown little reaction. Survation’s phone poll suggests a 10% lead, broadly in line with the Comres phone poll immediately before Obama’s speech. ICM’s online survey recorded a -2% lead for Remain, from - 1% a week before. But there is no sign of a boost for remain - if anything there has been a modest dip. This is contrary to betting markets which suggest the last week could have been significant. Ladbrokes bookmakers reported that 90% of new money had supported the remain camp in days after Obama’s speech. Betfair’s percentage chance of remain rose to 73% (currently 71%), up from the 65- 70% range traded over the past two months. Financial markets also appear to have reduced their bets for Brexit, sterling having risen in recent days Leavers struggle to address economic cost of exit Last week HM Treasury published a “rigorous and objective economic analysis” assessment of the longterm economic impact of leaving the EU2 . The Treasury’s analysis considered three alternative post-exit trade arrangements with the EU: EEA3 membership (the Norway model), a negotiated bilateral agreement 1 The Organisation for Economic Co-operation and Development 2 HM Treasury analysis: the long-term economic impact of European Union (EU) membership and the alternatives. HMT, 18 Apr 2016. 3 European Economic Area Exhibit 1 Remain lead dips, but has recently recovered Source: Financial Times (FT) and AXA IM Research -10 -5 0 5 10 15 20 25 30 -10 -5 0 5 10 15 20 25 30 Sep 15 Oct 15 Nov 15 Dec 15 Feb 16 Mar 16 Apr 16 % Brexit polls (lge) - Net margin to remain in the EU Net margin (large sample surveys) Net margin (phone polls) UK government submits reform proposals EU Summit agrees UK reform proposals Paris terrorist attacks Brussels terrorist attacks 2  AXA INVESTMENT MANAGERS - INVESTMENT RESEARCH - 28/04/2016 (Switzerland/Canada) and no specific agreement i.e. WTO4 membership. Using “a negotiated bilateral agreement like Canada as the central assumption”, the Treasury estimated an economic impact of 4.6-7.8% of GDP by 2030 (this compared with a 3.4-4.3% and 5.4-9.5% estimated cost under the EEA and WTO scenarios respectively). HM Treasury suggested this would primarily reflect weaker trade and investment flows, particularly foreign investment flows, reflecting reduced “openness and interconnectedness”. The analysis drew on internal and external sources and employed “gravity modelling” to separately identify the influence of different trade regimes on trade and foreign direct investment (FDI) to estimate the effects of changing regime. Treasury report also estimated that government receipts would be £36bn/year lower by 2030 under this scenario (£20bn and £45bn under alternate scenarios), even after savings from reduced budget payments to the EU. Yesterday the OECD published its assessment of the impact of Brexit5 . It’s modelling approach focused on a more comprehensive set of assumptions looking beyond the impact of free trade agreements and FDI, to include assumptions of R&D impacts, levels of competition and deregulation. The OECD estimated that the impact on GDP by 2030 would be 2.7- 7.7% of GDP. The OECD also looked at the short-term impact of exit (the initial four years). It estimated GDP to be 3.3% by 2020. The conclusions of both the OECD and HM Treasury reports are similar to our own assessment published in January6 . We suggested a 2-7% impact on GDP by 2030, with the impact of the changing nature of the trade relationship constituting the majority of this decline. Like the OECD, we also envisage the majority of this impact to be front-loaded. Justice Minister Michael Gove spoke the day after the Treasury report was published7 . He discussed more than just the economic case to leave the EU, including issues of sovereignty, democratic accountability and global security. However, Gove suggested the UK would operate outside of the Single Market after leaving the EU, operating in a broader free trade zone alongside countries including Bosnia, Serbia, Albania and Ukraine. To our minds, this would result in a significant headwind to activity, particularly for services and financial services. US President Obama also intervened in the Brexit debate during a trip to the UK last weekend. President Obama stated that the UK was at its best helping to lead a strong EU; that the UK leveraged its power through the EU; and that “America wants Britain's influence to grow, including within Europe”. President Obama also dismissed claims that the UK could quickly re-orientate trade policies around a UScentric ‘Anglosphere’, saying that the UK would be at the “back of the queue” when it comes to negotiating new trade deals, something he said could “be ten years from now”. This explicitly contradicted Gove’s suggestions that the UK could “seal those deals more quickly.” 55 days to go... With 55 days to go, phone polls have regained a 10%+ lead following a dip after the Belgian attacks. The publications of the Treasury’s long-term economic assessment and US President Obama’s intervention may be expected to have a positive effect on the remain camp’s lead. Betting markets suggested a move in favour of remain in the wake of these developments. Initial polls show no discernible reaction. Overall, polls continue to support our central case scenario that the UK will vote to remain in the EU on 23 June. Looking ahead, UK asset markets look set to continue to trade with ‘Brexit’ idiosyncrasy. Such moves are consistent with our expectation that post-referendum, a vote to stay would likely see sterling pick-up sharply, FTSE 250 outperform 100 and a modest easing in gilt yield spreads. We await HM Treasury’s upcoming assessment of the short-term impact of Brexit. Chancellor Osborne has stated that this will be published in May. On the face of it, this could prove even more politically contentious, requiring a greater degree of judgement to discern the short-term effect. This will leave the analysis again open to the accusation of political bias. 4 World 

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