In a newly published paper by BlackRock Investment Institute, "Brexit: Big Risk, Little Reward -The UK Referendum on Europe", co-authors Philipp Hildebrand, Rupert Harrison, Ewen Cameron Watt, Joanna Cound and Joe Di Censo outline their view on a potential "Brexit."
The UK would be economically worse off in the end, according to Blackrock's report. Outside the union, the UK would likely have reduced leverage to negotiate trade deals for the services sector and regulatory standards for EU market access – both lengthy and painful processes.
Meanwhile, global markets that are already affected by the oil price and a Chinese slowdown would see increased volatility rising ahead of the referendum as both UK and European assets are affected. "An actual Brexit would hit global risk assets, we believe, whereas a vote to stay would reassure markets," said BlackRock’s investment institute.
With regards to sterling - which is most vulnerable to Brexit fears as it is the most liquid UK financial asset- it would also be beneficial to stay in the union, according to Blackrock. "A Brexit could pressure the UK’s budget and current account deficits, hurting the currency and potentially triggering credit downgrades," said the firm. On the contrary, if the UK votes to stay a depressed sterling would bounce back.
In addition, a Brexit could deal a blow to domestically focused UK equities and large cap overseas earners would be expected to outperform as sterling falls, according to the research paper. At the same time, said the authors, a leave vote poses risks to the London property market as at least some corporate office demand is based on access to EU’s single market.
The apparent fiscal gains from leaving the EU would be offset by a cut into the financial industry’s outsized contributions to the UK economy, tax revenues and trade balance if Britain leaves, noted the report.
And while the EU would lose easy access to its financial centre, a Brexit could also spur separatist calls and embolden populist parties across the continent, according to the publication.