What would Brexit mean for expats?
David Hughes, Regional Director at deVere Acuma, looks at what a UK exit from the European Union would mean for expats
On June 23 Britain will decide whether to remain in the European Union (EU) or choose to leave. A vote to leave is likely to have ramifications on global capital markets, directly affecting investors’ savings. UK expats, who tend to have most exposure to sterling and UK assets, will be most affected.
Let’s first disillusion ourselves that Brexit will make the UK a more prosperous country, and so increase the value of sterling and UK assets, from equities to residential property. It won’t.
Regaining sovereignty over immigration, and many areas of law such as health and safety and copyright protection, will not turn the UK into an economic dynamo.
It will simply lead to new, domestic law being introduced, with the underlying problems (such as an overconcentration of economic activity in the South East of England, and inferior infrastructure) still limiting economic growth. Any limits on immigration will raise wages, but weak productivity growth means that businesses will pass these onto the consumer, resulting in decreased standards of living.
WHAT ABOUT YOUR SAVINGS? The near-term impact on Brexit for savers will be in two forms. First, sterling is likely to weaken sharply due to the uncertainty of political and economic policy ahead. Arguably for some time the currency has been punching above its weight, given the large trade and investment deficits that together have created a record current account deficit of over 7 per cent of GDP. It has been protected by relatively strong economic growth, but this could fall sharply if inward and domestic investment, and consumer spending, dry up due to uncertainty.
Few economists wish to give precise forecasts, but Goldman Sachs have predicted a 20 per cent fall in sterling against the dollar in the event of Brexit.
While large blue chip UK companies will have some protection from a weaker UK economy due to export earnings, domestic focused mid and small cap companies are vulnerable and are likely to underperform on the FTSE index of blue chip stocks.
UK property is also likely to suffer from Brexit. Not only will curbs on immigration reduce demand forecasts, but mortgage costs are likely to rise as sterling volatility and weakness push up the costs of inter-bank lending rates. This will feed through into higher lending rates, as mortgage providers recoup the increased cost of their funding.
Brexit comes at a bad time for the property market, with the market appearing to have slowed in recent months due to a combination of new regulation aimed at limiting buy-to-let, and high prices having priced out demand. WHAT IT WILL MEAN GLOBALLY
Brexit will have international ramifications. The US Fed has made it clear that a vote by Britain to leave the EU will influence the timing of the next rate hike. It fears the shock of Brexit will lead to weakness in both the UK and European economies, as trade flows shrink between the two. Therefore a Brexit may lead to a postponement of the next Fed rate hike.
Furthermore, the US shares the fears of German Chancellor Angela Merkel, that Brexit will encourage other separatist movements within the EU, making the union more fractious and harder to reform. This may damage the euro.
Greater, not less, political and fiscal union is needed to save the euro. This will enable transfers from north to south Europe to be made, to help stabilise and grow the southern economies. In return the north will demand some degree of political control on how those funds are spent, and they will demand deep structural reforms that will help improve productivity growth. These can only be done with ‘more Europe’.
Investors seeking protection from a vote to leave the EU should seek protection in USbased assets, and the US dollar.
HAVE YOUR SAY Are you voting in or out? Tweet us @7DAYSUAE or email email@example.com
FIND OUT MORE ABOUT BREXIT deVere Acuma (part of the deVere Group) will be hosting a Brexit Seminar tomorrow at the Address Hotel - Dubai Marina. Places are limited, send your RSVP to firstname.lastname@example.org
STAY OR GO: The British have a big decision to make on June 23