Eng­land early Euro 2016 exit may wipe £6b off eq­ui­ties

Pakistan Observer - - ECONOMY WATCH -

LON­DON—As de­bates over the im­pact of Brexit on the UK econ­omy reach­ing a fever-pitch ahead of the June 23 ref­er­en­dum, a fi­nance ex­pert from Lon­don Busi­ness School warned that even an early elim­i­na­tion for Eng­land from the Euro 2016 could wipe £6 bil­lion off the stock mar­ket in a sin­gle day.

Alex Ed­mans, Pro­fes­sor of Fi­nance, Lon­don Busi­ness School, said the ef­fect of foot­ball re­sults on na­tional mood is so strong that it can spill over into the stock mar­ket and cause swings of bil­lions of pounds.

“My re­search shows that a loss in a ma­jor foot­ball com­pe­ti­tion can have a pro­foundly neg­a­tive ef­fect on in­vestor mood. Share prices are af­fected not only by fun­da­men­tals, but also by emo­tions. Sports have huge ef­fects on peo­ple’s emo­tions,” Ed­mans said.

With just a few weeks to go un­til the UK’s ref­er­en­dum on its mem­ber­ship of the EU, opin­ion polls still sug­gest that the out­come will be close.

An­a­lysts at Emi­rates NBD be­lieve that the re­cent mo­men­tum gained by the leave cam­paign would un­nerve the mar­kets as the poll date nears. “We ex­pect higher volatil­ity in UK as­set mar­kets and pos­si­bly a chill wind through global mar­kets,” they said in a re­port “Brexit - too close to call.”

The pos­si­bil­ity that the UK could leave the big­gest sin­gle mar­ket in the world raises con­sid­er­able ques­tions about UK growth, in­ter­est rates, cur­rency move­ments, trade, cap­i­tal flows and for­eign di­rect in­vest­ment, as well as about se­cu­rity and nu­mer­ous other po­lit­i­cal is­sues and risks, they said.

Ac­cord­ing to them, ster­ling re­mains very vul­ner­a­ble with down­side risk to $1.20 on a vote to leave while the UK sov­er­eign credit rat­ing faces a down­grade if the vote is to leave lead­ing to a pos­si­ble steep­en­ing of the yield curve. A de­ci­sion to stay should bring a re­lief rally in longer dated gilts, although global fac­tors have al­ready brought yields to their lows.

They ar­gue that for eq­ui­ties the net im­pact of a de­ci­sion to leave the EU could be pos­i­tive for cor­po­rate prof­its but bad news for the val­u­a­tion of the mar­ket lead­ing to up to 10-15 per cent down­side. A de­ci­sion to stay in the EU is likely to have a muted im­pact from cur­rent lev­els, the bank an­a­lysts said.

“The pound has al­ready been the weak­est per­former among the ma­jor cur­ren­cies so far in 2016, fall­ing around two per cent against the dol­lar, and at one point reach­ing 1.3834 af­ter the ref­er­en­dum was an­nounced in Fe­bru­ary. It has also fallen by al­most eight per cent from this time a year ago. How­ever, there is po­ten­tial for it to be much weaker in the event that the UK ac­tu­ally de­cides to leave the EU on the 23rd June, de­clines which would be ac­com­pa­nied by sig­nif­i­cant amounts of volatil­ity,” Emi­rates NBD re­port said.

Two polls on Satur­day showed vot­ers were still closely divided over whether to end Bri­tain’s Euro­pean Union mem­ber­ship, a day af­ter an­other sur­vey put the ‘Leave’ cam­paign 10 points ahead, un­der­lin­ing the con­tra­dic­tory polling less than two weeks be­fore the ref­er­en­dum.

The pound weak­ened by as much as 1.2 per cent against the US dol­lar im­me­di­ately af­ter a poll for a lead­ing Bri­tish news­pa­per, show­ing a sharp swing to­ward a vote for Bri­tain to exit the EU, was pub­lished on Fri­day evening.—Agen­cies

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