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