8th May 2015
A majority government may have brought some stability to Westminster in the short-term but thoughts are already turning to an EU referendum and even a second vote on Scottish independence.
The threat of certainly one referendum but possibly two, will have on markets, sterling, businesses, and investor confidence.
Experts give their view on how a 2017 EU referendum and potentially another Scottish independent vote will affect the UK.
Referenda could weigh on sterling
Simon Derrick, BNY Mellon chief currency strategist
Looking ahead the principal concern among investors will be the possibility of at least one and possibly two referenda in the UK over the next few years. Many will remember how poorly sterling performed in early September last year in the face of a potential Scottish exit from the union and wonder whether the threat of two new votes could similarly weigh on the currency.
While this could certainly prove to be a factor in the shorter term (though sterling is certainly holding up well for the moment) it is worth remembering two things. Firstly that both an EU referendum or a possible rerun of the Scottish referendum would be several years in the future. Secondly, the Scottish referendum in 2014 only impacted sterling in the immediate run up to the vote despite a tight race through most of the year. In other words we suspect these potential votes will not weigh on thinking for more than a week or so.
Desire to leave EU reducing
Tony Nangle, head of multi-asset, EMEA at Columbia Threadneedle Investment
The next steps will be to consider what risks the Conservatives’ pledge for an EU referendum in 2017 will pose. Recent polling suggests that UK voters have moved away from a desire to leave the EU, but recent experience around the Scottish Referendum shows how sharply polls can change. The combination of a Conservative government and the SNP’s overwhelming victory in Scotland also raises the prospect of a second Scottish referendum.
We have been overweight UK equities in asset allocation portfolios and will be monitoring market developments as always to establish whether this continues to be appropriate.
Investment could be delayed
Azad Zangana, senior European economist at Schroders
In time, the focus of investors will shift to the uncertainty that will come ahead of the proposed referendum on the UK’s membership of the European Union in 2017, which could prompt some domestic and overseas investment to be delayed. Latest polls on the question suggest that those that want to remain in the union have a small lead, but that the majority are undecided.
EU call is a whimper not a wail
Julian Chillingworth, chief investment officer Rathbone Unit Trust Management
Whilst thoughts will now shift to a ‘Brexit’, some reports suggest an earlier than expected referendum, but there is every chance that the European issue could now prove to be more of a whimper than a wail. Questions also remain over Scotland and the possibility of another referendum there. Sterling is at the behest of external factors, especially the plight of the euro – the best we can hope for is that it remains range-bound. Conclusion: the election dance is over but the more important global mood music continues.
Politicians need to understand the EU issue
Rory Bateman, head of UK and European equities at Schroders
Looking ahead, the Conservative manifesto has promised an EU referendum by the end of 2017 which will undoubtedly create some uncertainty going forward but this is unlikely in the short-term. We do not know how significant the threat of a possible ‘Brexit’ really is given David Cameron has not disclosed the messaging around the ‘in’ or ‘out’ campaign. Recent business leader surveys suggest a majority would like to remain within the EU and it seems clear the Europeans themselves would like the UK to remain a significant player in Brussels.
Leaving aside eurosceptic Conservative backbenchers, we hope the economics of Britain’s position in Europe will be the main focus of the referendum debate. We currently run a significant current account deficit with the EU, although the financial services sector runs a £19 billion surplus.
Politicians will need to demonstrate they fully understand the implications of remaining within or withdrawing from the EU.
In the short-term it seems clear the election result should provide businesses with a stable political and legislative background in which to invest for the future. We welcome that stability and anticipate the UK economy growing above 2% for the next couple of years, which should be beneficial for UK companies, particularly those with a domestic focus.
We remind investors that international influences continue to be extremely important given 75% of revenues are derived overseas for the UK quoted market. We remain optimistic on the broader global economy which has a significant bearing on the companies in which we invest.