For professional investors
‘Bremain’
or
‘Brexit’?
WHITE PAPER
May 2016
Léon Cornelissen
Chief Economist
Robeco Investment Solutions
Contents
2 | ‘Bremain’ or ‘Brexit’?
Introduction: Britons go to the polls
3
How likely is a Brexit?
6
The consequences of a Brexit
7
The trade options for the UK following a Brexit
11
Conclusion: Best of both worlds?
14
Intro
Britons go to the polls on 23 June 2016
in an historic referendum that will answer
a question that has vexed the country for
decades: whether or not to remain a member
of the European Union. The referendum
was called as a manifesto promise of the
ruling Conservative Party which was reelected in May 2015, partly to assuage the
growing popularity of the United Kingdom
Independence Party (UKIP) and years of splits
within its own ranks. The country of 60 million
people – the second-largest population and
economy within Europe – has also long been
divided on whether to leave the ‘Common
Market’ that it joined in 1973. The arguments
for remaining – the ‘Bremain vote’ – are
largely economic, while the arguments for
leaving the 28-nation bloc – the ‘Brexit vote’
– are largely to regain an independence and
freedom that many feel has been steadily
eroded by the power of bureaucrats in
Brussels. In this white paper we explain the
process, the likely outcome of the vote, and
the consequences for both Britain and the EU
of either a Bremain or a Brexit, and the future
for both after 23 June.
‘Bremain’ or ‘Brexit’? | 3
“This is like the jailer has accidentally left the door of the jail open and people can see the
sunlit land beyond.” - Boris Johnson MP, Mayor of London, 2008-2016.
Withdrawal from the EU would pose “major challenges for the United Kingdom and the rest
of Europe… negotiations on post-exit arrangements would likely be protracted, resulting in
an extended period of heightened uncertainty that could weigh heavily on confidence and
investment, all the while increasing financial market volatility.” - IMF
How (not) to leave the EU | The two quotes above neatly encapsulate the principle pros
and cons for Britons of leaving the EU. For Boris Johnson, a British Conservative MP and
Mayor of London for eight years until May 2016, it means freedom from the “jail” that
is having foreigners as your overlords. For the IMF (and investors), it means instability,
volatility and years of upheaval that would directly threaten investment in a UK that lay
outside of the world’s largest free trade zone. The decision on which way to jump lies with
46 million voters who on Thursday 23 June will answer a crucial question:
‘Should the United Kingdom remain a member of
the European Union, or leave the European Union?’
In common with most referendums, any vote above 50% would result in a victory for either
the Bremain or Brexit camps. If the vote is for a Brexit, then under the Treaty of Lisbon,
it would trigger a two-year ‘divorce’ once the necessary legislation was passed by the UK
Parliament. A vote for Bremain means the status quo is maintained. However, the size of the
victory margin remains key to what would happen immediately afterwards.
A large, decisive victory would probably bury the question for at least a generation. In the
1975 referendum, Britons voted 67% in favor of remaining part of what was then a ninenation Common Market, authorizing the government’s action in taking the UK into the
trading bloc two years earlier. The issue did not rear its head again until the early 1990s,
when the 1992 Maastricht Treaty led to the creation of the euro and far greater powers for
Brussels over member states. Such was the backlash in Britain to what was seen as creeping
EU powers over UK sovereignty, including a new federalist currency (which the UK declined to
join), it caused a deep rift within the ruling Conservative Party and led to the creation of UKIP.
However, a small majority would make it likely that the Brexit question would be raised again
not far in the future, and Brexit risks would continue to cause instability in financial markets.
The problems of small majorities was evidenced in the 2014 poll for Scottish independence,
which resulted in 55% voting for Scotland to remain part of the UK and 45% for it to leave
4 | ‘Bremain’ or ‘Brexit’?
‘This is
like the
jailer has
accidentally
left the
door of the
jail open
and people
can see the
sunlit land
beyond.’
the Union. The slim size of the majority has led to the issue recurring, with calls for a new
referendum following the landslide victory of the Scottish Nationalist Party (SNP) in the
general election of 2015 just eight months later.
A decisive majority in favor of a Brexit would trigger a series of political events, most likely
beginning with a new Prime Minister chosen in accordance with support for the referendum.
Current Conservative leader David Cameron, who has led the Bremain campaign, would
almost certainly stand down, along with Deputy PM George Osborne. The Conservatives
would need to elect a new leader, who would probably be Boris Johnson, who backed the
Brexit campaign. The newly composed British cabinet would need to quickly notify the
European Council of the intention of the UK to withdraw, triggering a maximum of two years
in which divorce arrangements have to be negotiated. It is unlikely that two years will be
sufficient for a comprehensive agreement, but it is even more unlikely that a unanimous
decision of the remaining 27 EU states would be taken to authorize an extension of the
two-year period. In any case, the period of heightened uncertainty following the notification
of the UK’s intention to leave would most certainly take longer than two years, damaging
investor confidence and contributing to increasing financial market volatility.
Things get more complicated in the case of a thin majority in favor of a Brexit. It would
greatly increase the temptation for the UK government (new or not, reshuffled or not) to try
to get some additional concessions from the EU in exchange for a new referendum, to avoid
triggering a Brexit. One argument could be the perceived economic costs of a Brexit which
for the EU could be an attractive proposition as well. It would avoid lengthy negotiations
in unchartered waters, and avoid the stigma of the UK becoming the first nation trying to
leave the EU. There are precedents for this course of action. After an initial rejection of the
Maastricht Treaty in Denmark for instance, the Danish government sought four exemptions
on existing EU treaties. These were granted, and in a new referendum, the Maastricht Treaty
was ratified. In seeking new negotiations, the UK government could therefore postpone
notifying the European Council of its intention to leave. And political events elsewhere would
mean the EU would not be in a hurry to quickly round off negotiations. It is likely to want to
wait for the results of the French presidential elections scheduled to be held in April and May
2017 and the German Bundestag elections due in autumn 2017. It is unlikely that French and
German political leaders would be prepared to make meaningful concessions towards the
UK in the run-up to these elections. So a long period of uncertainty could start, in which the
in/out question would remain far from solved. It is important to remember that the initiative
to trigger a withdrawal from the EU lies solely with the UK government, and a less-thandecisive outcome of the referendum could make a delay tempting. This wouldn’t be cost-free
in economic terms, though it would buy the UK government some time.
‘Bremain’ or ‘Brexit’? | 5
How likely is a Brexit? | So how likely is a Brexit? Opinion polls suggest a close race, but they
have proved to be unreliable in the past, as evidenced by the failure of all the major polling
companies to predict the outcome of the 2015 UK general election. The Conservatives, who
had been in coalition with the minority Liberal Democrats, were expected to need to form
another coalition; in fact they romped home with an absolute majority. The same polls also
failed to predict the extent of the SNP’s landslide victory in Scotland, or the fact that UKIP
would end up with only one seat despite receiving four million votes. In the EU referendum,
polls so far up to the middle of May have predicted a narrow majority for Bremain, with
about 43% committed to remaining and 37% wanting to leave. The ‘don’t knows’ of 20%
would be key here, though British tradition suggests that those who fail to give a firm view
ahead of a national election usually end up voting with the status quo, which would give a
comfortable majority to the Bremain camp.
The well-known methodological problems make the predictive power of polls relatively
weak compared to betting markets, exacerbated by the fact that no real money is at stake.
Bookmakers’ odds suggest a much larger majority for Bremain, with a 71% chance of the UK
staying in the EU and a 29% chance of it leaving. The added advantage of such odds is that
the ‘don’t knows’ are excluded, since votes must ultimately be cast for or against, and it is
not possible to bet on an abstention.
Date
5 Jan
1 Feb
1 Mar
1 Apr
13 Apr
20 Apr
26 Apr
4 May
In
65%
69%
69%
67%
67%
65%
74%
71%
Out
35%
31%
31%
33%
33%
35%
26%
29%
Aggregated across 16 bookmakers. Source: JP Morgan
Subsequently, our baseline scenario is that a clear majority of the British electorate will choose
for the UK to remain within the EU, as is suggested by the remarkably consistent odds of major
bookmakers, and in line with the less reliable but still relevant opinion polls.
And it is wise to consider the ‘don’t know’ issue as being key here: the ‘fear factor’ will play an
important role in convincing the UK electorate of the potential consequences of a Brexit. The
Bremain camp has consistently warned that leaving would have major short-term and longterm economic costs, knocking as much as 8% from GDP within three years according to the
most pessimistic estimates. Certainly, the economic case for a Brexit is weak. The lack of open
access to the world’s largest free market would certainly badly affect British trade, though
Brexit supporters have counter-argued that it would also liberate the UK from EU red tape and
allow trade deals to be forged with other regions such as the US.
6 | ‘Bremain’ or ‘Brexit’?
The consequences of a Brexit | But what if the polls, bookies and commentators are all
wrong, and the UK votes to leave the EU after all? What would be the consequences of a
Brexit for the UK, EU, and the rest of the world? In this next section we discuss the likely future
for an independent UK – for as long as the UK lasts – following its historic invocation of Article
50 of the Lisbon Treaty:
1. Any Member State may decide to withdraw from the Union in accordance with its
own constitutional requirements.
2. A Member State which decides to withdraw shall notify the European Council of
its intention. In the light of the guidelines provided by the European Council, the
Union shall negotiate and conclude an agreement with that State, setting out the
arrangements for its withdrawal, taking account of the framework for its future
relationship with the Union. That agreement shall be negotiated in accordance
with Article 218(3) of the Treaty on the Functioning of the European Union. It shall
be concluded on behalf of the Union by the Council, acting by a qualified majority,
after obtaining the consent of the European Parliament.
3. The Treaties shall cease to apply to the State in question from the date of
entry into force of the withdrawal agreement or, failing that, two years after the
notification referred to in paragraph 2, unless the European Council, in agreement
with the Member State concerned, unanimously decides to extend this period.
1. The short-term economic impact | Uncertainty around the Brexit debate is already
hurting the British economy. Understandably, companies are choosing a ‘wait-and-see’
attitude in the run-up to the referendum and are postponing investment decisions for the
time being. As a consequence, UK growth is weakening, sterling is sliding, and the current
account deficit is widening further. The UK’s current account deficit is relatively high for a
developed economy and is becoming a persistent feature. It has widened sharply from being
just over 2% of GDP between 2001 and 2010 to a record of 7% in the fourth quarter of 2015.
On the one hand, the UK is earning less on its foreign assets than the rest of the world is
earning on its UK assets. On the other hand, exports of UK goods to the EU have declined
sharply. Exports levels should in principle improve as a consequence of the continuing
upswing of the EU economy, and the decline of sterling against the euro, making British
exports relatively more attractive. However, any progress on this could easily be destroyed if
a Brexit leads to a balance of payments crisis. If investors generally fear that UK growth would
slow dramatically as a consequence of a Brexit, the UK could easily run into trouble in trying
‘Bremain’ or ‘Brexit’? | 7
to finance its current account deficit, exacerbated by its relatively high government budget
deficit (5.6% GDP in 2015). The Bank of England would then have to hike rates, damaging
economic growth further.
But do investors generally expect a deterioration of growth? Yes. Studies by brokers on the
effect of a Brexit on UK GDP differ on the size of the impact, and they use different time
horizons, but all conclude that there would be a negative impact. The range lies between a
1% hit to GDP on a one-year horizon (the most optimistic) to an 8% contraction over a fiveyear horizon (the most pessimistic). The key driver of course is the uncertainty of the nature
of what would be the UK’s future relations with the EU and the rest of the world, which is
damaging investment and consumer confidence. The OECD reckons with a loss of 3.3% to
GDP until 2020.
UK business investment – quarterly percentage change
8
6
4
2
0
-2
-4
-6
-8
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016
Source: ThomsonReuters DataStream
Sterling broad trade-weighted index
120
100
80
60
1-11990
1-11995
Source: ThomsonReuters DataStream
8 | ‘Bremain’ or ‘Brexit’?
1-12000
1-12005
1-12010
1-12015
UK current account as a percentage of GDP
1
0
-1
-2
-3
-4
-5
-6
-7
-8
Q1
1995
Q1
1996
Q1
1997
Q1
1998
Q1
1999
Q1
2000
Q1
2001
Q1
2002
Q1
2003
Q1
2004
Q1
2005
Q1
2006
Q1
2007
Q1
2008
Q1
2009
Q1
2010
Q1
2011
Q1
2012
Q1
2013
Q1
2014
Q1
2015
Source: ThomsonReuters DataStream
UK GDP – quarterly changes
8
6
4
2
0
-2
-4
-6
-8
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Quarterly: 4.0%
Four-quarter: 2.1%
Source: ThomsonReuters DataStream
2. The longer-term economic impact | The longer-term damage is more difficult to
assess because it would depend crucially on policy steps taken by the UK government
to handle the post-Brexit world. It should be kept in mind that the UK is already one of
the most competitive developed economies in the world, especially regarding its labor
market, business environment and market regulation. There is, of course, always room for
improvement (education and infrastructure for instance), but it is important to note that
there is little evidence that the EU is currently holding the UK back. The OECD reckons with
longer-term economic damage of between 2.7% and 7.7% knocked off GDP in the run-up to
2030 (with a baseline scenario of -5.1%). Lower trade openness, the reduced attractiveness
of the UK for foreign direct investment, less domestic investment and fewer benefits from
immigration would be the main drivers for these inevitable long-term costs, according to
the OECD.
‘Bremain’ or ‘Brexit’? | 9
3. The implications for the City of London | The position of the City of London as one of
the world’s foremost financial centers partly depends on the free movement of capital and
people. The UK’s continued refusal to join the euro has never hurt its status; predictions
that this would lead to a weakening of the City as a global financial center with a transfer of
gravity to Frankfurt and/or Paris have not come true. In fact, the sterling/euro currency trade
remains a vibrant business employing many hundreds of people. The impressive critical mass
of London and its highly developed judicial and supervisory infrastructure are also sufficient
conditions to allow the City to blossom as a financial center.
But it would be a different matter outside the EU. UK financial institutions would lose access
to the internal market and the EU supervisory institutions could easily push for a transfer of
the bulk of activities to the continent. It has every incentive to do this (to show that leaving
the EU comes at a price), partly as a consequence of the Panama Papers, where the bulk
of tax-dodging offshore accounts were found to be in British dependent territories. The EU
would have no incentive to allow the City, lying outside its jurisdiction, to become a giant
version of Jersey or the Cayman Islands attracting foreign capital.
4. The implications for the UK itself: A Brexit could provoke a Scoxit | The fervor for
independence does not just lie within the British anti-EU camp; millions of Scots want to leave
the UK and resurrect the independent Scotland that prevailed for hundreds of years before
the Act of Union in 1707. The SNP lost the 2014 referendum but achieved an unprecedented
landslide victory in the UK general election of 2015 on the back of pro-nationalist sentiment,
winning 56 of the 59 Scottish seats in the 650-seat British Parliament. The SNP also has
run the devolved Scottish Parliament in Edinburgh since 2007, winning the 2016 election to
retain power for a third term, albeit with no absolute majority.
What complicates matters for the British government in Westminster is that the SNP wants
any future independent Scotland to remain within the EU. Though the collapse in the oil
price has made independence less attractive for oil-rich Scotland in narrow economic terms,
in political terms the main opposition to the EU has been seen south of the border. If England
votes to leave the EU and Scotland doesn’t, it means that the Scottish could claim they are
being forced out of the EU in tandem through English rather than Scottish assent. A new
referendum on Scottish independence would therefore need to be held, according to SNP
leader and Scottish First Minister Nicola Sturgeon. If the new referendum affirms Scottish
independence, Brexit negotiations would be conducted not by a United Kingdom, but its
remaining collective of England, Wales and Northern Ireland.
As such this would diminish the economic and diplomatic clout of the UK further, complicating
negotiations with other economic blocs following the Brexit. Furthermore, Plaid Cymru, the
nationalist party that seeks Welsh independence, but like their Scottish counterparts, also
10 | ‘Bremain’ or ‘Brexit’?
supports continued EU membership, would be emboldened. And pressure would grow for
the reunification of Northern Ireland, which is staunchly pro-Union and is heavily subsidized
by the UK, with the Republic of Ireland. The Irish Republic has a much higher GDP/capita
and a more dynamic economy than Northern Ireland, making the case for a united Ireland
more economically attractive if the long-standing political problems could be addressed.
Theoretically therefore, a Brexit could lead to the complete collapse of the UK, leaving only
an independent England.
However, the leaders of the Bremain campaign, including Boris Johnson, have said they
expect Scottish voters to vote either for or against leaving the EU in the same pattern as the
rest of the UK. The intriguing possibility of a bizarre tactical vote, in which Scots vote for a
Brexit in order to try to force a Scoxit could not work, because the precise voting breakdown
would become known. It means a majority vote for a Brexit in Scotland would force the
SNP to ditch its commitment to the EU, and go back to the drawing board over its own
referendum call.
The trade options for the UK following a Brexit
The current overlapping trade areas: the EU, European Economic Area, European Free
Trade Association and the Customs Union. Source: HM Treasury
The biggest fear for those opposed to a Brexit is the loss of tariff-free participation in
the world’s largest single market. The EU is by far the most important trading partner
for Britain, accounting for 44% of total exports and 53% of imports. This is based on
access to the single market, so leaving the EU would necessitate negotiating an adjusted
trading relationship. In principle, existing agreements between the EU and non-EU
countries could be used as a model for a future UK-EU-relationship following a Brexit.
‘Bremain’ or ‘Brexit’? | 11
These three models are:
1.
The Norway model – membership of the European Economic Area
2. The Canada model – forging a bilateral agreement
3. The WTO model – a relationship under WTO rules as currently used by Russia
This pretty much encompasses all the available options, as no country outside the EU has
been able to negotiate any other sort of deal, and it is unlikely that the EU would consider it
to be in its own interests to agree on another sort of deal with the UK. It is also important to
note that in the case of a Brexit, the UK would no longer have the right to benefit from the
EU’s Free Trade Agreements with third party countries. So this would mean the UK would
need to negotiate trade agreements with more than 50 countries outside the EU with which
it can currently trade freely thanks to the FTA. Negotiations typically take time – experience
has shown that they usually take anywhere between four and ten years. The EU is not uniquely
sluggish, as the protracted negotiations with Canada have proved. Let us now look at these
three options in turn:
The Norway model | This neatly illustrates how the UK would become a ‘rule taker’ if this
model is applied. It would allow trading with the single market without tariffs, with the
exception of agriculture and fisheries. However, it comes at a cost: Norway is required to
comply with the full regulatory framework of the single market, as well as EU legislation in
other areas. Norway is currently obliged to accept the free movement of people from the
EU (and other EEA countries, of course) which would make this unacceptable to a Brexit
camp which has been consistently opposed to unfettered immigration. Millions of EU citizens
work in the UK, from the early example of ‘Polish plumber’ following Poland’s accession in
2004, to the fact that London is now the third-largest French city due to the high number of
French nationals living in the capital. Moreover, Norway makes a significant contribution to
EU spending.
The Canada model | In principle a bilateral, custom-made free trade agreement between
the UK and the EU would be possible, similar to the current agreements the bloc has with
Canada, Switzerland and Turkey. But such an agreement would be difficult to negotiate: it
would have to be agreed unanimously by the remaining EU member states and be ratified
by all the national parliaments. It goes without saying that this would lead to lengthy
negotiations with multiple countries. As an illustration, the agreement with Canada (agreed
in September 2014, but not expected to be in force until early 2017) has already taken seven
years, while the complex set of agreements with Switzerland took over 20 years to put into
place. As in the case of Norway, Switzerland has to comply with a range of EU legislation, is
obliged to accept the free movement of people, and also has to make significant financial
contributions to the EU.
12 | ‘Bremain’ or ‘Brexit’?
The WTO model | This would be a minimalist model in which the UK would be subject to
the EU’s common external tariff on imports. The openness of the UK economy would be
severely reduced, but the flipside for Brexiters is that the UK would not have to implement
any EU rules. However, any UK businesses that wanted to trade with the EU would still have
to comply with EU rules on product standards, the environment and safety. While politically
this would be the most expedient, economically it would not have any major benefits over
the prior two models.
In conclusion, the Norway model would be the most restrictive from a UK point of view,
and the WTO model would not be economically beneficial. So it is more likely that the UK
would opt for the Canada model. As the negotiating process would most likely be long and
complex, the UK would be less attractive for foreign direct investment for a number of years,
and the final deal reached would not necessarily compensate for the loss of access to the
single market.
Would a Brexit foster further integration in the EU? | So much for the UK – what
would happen to the remainder of the EU following a Brexit? There is no denying that
a Brexit would hurt the EU’s prestige, pride, and its own trading prospects given that its
members currently enjoy free access to Europe’s second-largest economy and population.
Commentators speculate whether a Brexit would provoke greater dissent within the EU,
giving encouragement to nationalist movements that exist in other member states, and
lead to a Frexit (France), Grexit (Greece), Itexit (Italy) or any other –exit. Alternatively, the
EU’s remaining members could close ranks as the wounded divorcee, in fact fostering further
integration. Here we weigh up the likely options.
On the positive side for the EU, the weight of the 19 Eurozone countries vis-à-vis the remaining
eight non-euro members would increase significantly following a Brexit. This could lead to
more integration along the lines formulated in the ‘Five Presidents’ Report’ published in July
2015. The report laid out a framework for a deeper Economic and Monetary Union (EMU).
The report was written by the de-facto rulers of Europe: European Commission President
Jean-Claude Juncker; European Council President Donald Tusk; Eurogroup President Jeroen
Dijsselbloem; European Central Bank President Mario Draghi; and European Parliament
President Martin Schulz. A particularly contentious clause for the UK, which goes to the very
heart of the in/out debate, is the notion of ‘sharing of sovereignty’ through greater political
union. The UK has fervently opposed this even while it remains within the EU. This means that
other opponents of greater political union would see their position weakened, as the UK’s
countervailing power against the stanchly pro-union Franco-German axis would disappear.
‘Bremain’ or ‘Brexit’? | 13
Nevertheless, given the current huge and rising Euroscepticism within the EU, it remains
unlikely that major progress on political union would be made, unless it is forced upon the
union in the event of a renewed flare up of the euro crisis. Internal political developments
in important EU member states are all important here. The situation would become very
different, for example, if the far-right candidate Marine Le Pen becomes the next French
president. In this case a further unravelling of the EU would become likely, as it would
probably be impossible for the German government to continue to collaborate with France.
However, this is a scenario we consider to be highly unlikely.
Could a Brexit give rise to more exits? In our opinion this is not very likely in the short term.
The UK won’t be treated kindly during its divorce proceedings, and the EU has a strong
incentive to be a difficult negotiating partner for the UK to discourage other exits. It won’t
like to set a precedent and is unlikely to offer any favors. It is highly unlikely that the UK would
be offered continued unimpeded access to the single market unless it agrees to fully accept
EU rules, including freedom of movement, as is forced upon Norway and Switzerland. Free
access also means the UK would have to continue to contribute to the EU budget and accept
the jurisdiction of the European Court of Justice. It is not likely that the UK could accept
these conditions, not least as the perceived costs of contributing to the EU and being made
to accept decisions by European courts have been a major feature of the Brexit campaign.
So, difficult and lengthy negotiations would result. This lesson won’t be lost on other EU
countries: Eastern European nations have profited markedly from EU access, and given their
geographical proximity to the Russian Federation, this would make it likely for safety reasons
that they prefer to remain within the EU.
All in all, our base case scenario is that we consider it more likely that further integration
within the EU will be intensified in the long term after a Brexit, and we don’t expect a Brexit
to be a catalyst for unravelling.
Conclusion: Giving up the best of both worlds? | Currently, the UK enjoys the best of
both worlds with its membership of the EU. It is a highly competitive economy operating
within the largest single market in the world, while at the same time keeping its own
currency and independent monetary policy. The referendum on 23 June could change all
that. Leaving the EU would lead to a long period of uncertainty, curtailing investment and
consumer confidence, until new trade deals (if achievable) can be signed. GDP would almost
certainly be cut, leading to recession that may last for years. The economic malaise would
be exacerbated by the UK’s currently relatively high government budget and current account
deficits which forces the country to continue to live on the kindness of strangers. Although
markets have started to price in the non-negligible risk of a Brexit, and this risk is already
damaging UK growth, the cost would escalate significantly if a Brexit takes place.
14 | ‘Bremain’ or ‘Brexit’?
A Brexit would of course have repercussions for the EU as well. The euro could weaken as a
consequence of a new big sign of European discord, though at the same time a Brexit would
strengthen the position of euro countries within the EU now that the champion of a loose
free trade zone is leaving. Plans for greater monetary union are already pushing the EU into
greater centralization, and a Brexit could accelerate this process along the lines of the Five
Presidents’ Report.
Our base case scenario, however, is that a majority of the UK electorate will choose to remain
within the UK. Following a Bremain vote, a relief rally on UK assets and the British pound is
likely, and more so if the size of the majority is sufficiently large enough to bury the question
for at least a generation. Pent up investment would be unleashed, paving the way for
stronger GDP in the quarters to come.
As we started with quoting Boris Johnson, perhaps we should end with his comment over
his assertion that leaving the EU but trying to continue trading with it on the same terms as
before would be equivalent to the well-known British phrase of “having your cake and eating
it”. He quipped that he was “pro-cake, and pro-eating it.” To our mind, that more correctly
sums up the UK’s continued situation of having the best of both worlds in continuing to
remain in the EU, albeit it at a loss of some sovereignty.
References
– Centre for European Reform, The economic consequences of leaving the EU, April 2016
– Dhingra, Ottaviano, Sampson and Van Reenen, The impact of Brexit on foreign investment
in the UK, April 2016
– European Union: The Five Presidents’ Report: Completing Europe’s Economic and
Monetary Union, Jean Claude Juncker in close cooperation with Donald Tusk, Jeroen
Dijsselbloem, Mario Draghi and Martin Schulz, June 2015.
– Angel Gurría, OECD Secretary General, The Economic Consequences of Brexit: a taxing
question, April 2016
– HM Government, The process for withdrawing from the European Union, February 2016
– HM Treasury, The long-term economic impact of EU membership and the alternatives,
April 2016
– Open Europe, Where next? A liberal, free-market guide to Brexit, April 2016
‘Bremain’ or ‘Brexit’? | 15
Important Information
Robeco Institutional Asset Management B.V., hereafter Robeco, has a license as manager of UCITS and AIFs from the Netherlands Authority for the Financial Markets in
Amsterdam. Without further explanation this presentation cannot be considered complete. It is intended to provide the professional investor with general information
on Robeco’s specific capabilities, but does not constitute a recommendation or an advice to buy or sell certain securities or investment products. All rights relating to
the information in this presentation are and will remain the property of Robeco. No part of this presentation may be reproduced, saved in an automated data file or
published in any form or by any means, either electronically, mechanically, by photocopy, recording or in any other way, without Robeco’s prior written permission. The
information contained in this publication is not intended for users from other countries, such as US citizens and residents, where the offering of foreign financial services
is not permitted, or where Robeco’s services are not available. The prospectus and the Key Investor Information Document for the Robeco Funds can all be obtained free
of charge at www.robeco.com.
Additional Information for investors with residence or seat in Germany
This information is solely intended for professional investors or eligible counterparties in the meaning of the German Securities Trading Act.
Additional Information for investors with residence or seat in Hong Kong
This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is licensed and regulated by the Securities and Futures Commission in Hong Kong.
The contents of this document have not been reviewed by any regulatory authority in Hong Kong. If you are in any doubt about any of the contents of this document, you
should obtain independent professional advice.
Additional Information for investors with residence or seat in Singapore
This document has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this document and any other document or material in
connection with the offer or sale, or invitation for subscription or purchase, of Shares may not be circulated or distributed, nor may Shares be offered or sold, or be made
the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section
304 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”) or (ii) otherwise pursuant to, and in accordance with the conditions of, any other applicable
provision of the SFA.
Additional Information for investors with residence or seat in Australia
This document is distributed in Australia by Robeco Hong Kong Limited (ARBN 156 512 659) (‘Robeco’) which is exempt from the requirement to hold an Australian
financial services licence under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order 03/1103. Robeco is regulated by the Securities and Futures Commission
under the laws of Hong Kong and those laws may differ from Australian laws. This document is distributed only to wholesale clients as that term is defined under the
Corporations Act 2001 (Cth). This document is not for distribution or dissemination, directly or indirectly, to any other class of persons. It is being supplied to you solely for
your information and may not be reproduced, forwarded to any other person or published, in whole or in part, for any purpose.
Additional Information for investors with residence or seat in the United Arab Emirates
Robeco Institutional Asset Management B.V. (Dubai Office), Office 209, Level 2, Gate Village Building 7, Dubai International Financial Centre, Dubai, PO Box 482060, UAE.
Robeco Institutional Asset Management B.V. (Dubai office) is regulated by the Dubai Financial Services Authority (“DFSA”) and only deals with Professional Clients and
does not deal with Retail Clients as defined by the DFSA.
Additional Information for investors with residence or seat in France
In remuneration for its advisory and distribution activities in respect of the group’s UCITS, the parent company will pay the entity in France a fee, in application of all the
rules laid down by the Robeco Group with regard to transfer pricing:
- equivalent to 1/3 of the management fees applied to institutional-type units that do not give rise to a distribution fee (which distributor “clients” such as private banks
would receive, for example).
- equivalent to 2/3 of the management fees applied to “all investors” units that may, provided there is an agreement in place, give rise to payment of a distribution fee
(which distributor “clients” such as private banks would receive, for example) up to a maximum 50% of the management fees of the underlying UCIT. RIAM is a Dutch
asset management company approved by the AFM (Netherlands financial markets authority), having the freedom to provide services in France. Robeco France has been
approved by the French prudential control and resolution authority (formerly ACP, now the ACPR) as an investment firm since 28 September 2012.
Additional Information for investors with residence or seat in Spain
The Spanish branch Robeco Institutional Asset Management BV, Sucursal en España, having its registered office at Paseo de la Castellana 42, 28046 Madrid, is registered
with the Spanish Authority for the Financial Markets (CNMV) in Spain under registry number 24.
Additional Information for investors with residence or seat in Switzerland
RobecoSAM AG has been authorized by the FINMA as Swiss representative of the Fund, and UBS AG as paying agent. The prospectus, the articles, the annual and semiannual reports of the Fund, as well as the list of the purchases and sales which the Fund has undertaken during the financial year, may be obtained, on simple request
and free of charge, at the head office of the Swiss representative RobecoSAM AG, Josefstrasse 218, CH-8005 Zurich. If the currency in which the past performance is
displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may
increase or decrease if converted into your local currency. The value of the investments may fluctuate. Past performance is no guarantee of future results. The prices
used for the performance figures of the Luxembourg-based funds are the end-of-month transaction prices net of fees up to 4 August 2010. From 4 August 2010, the
transaction prices net of fees will be those of the first business day of the month. Return figures versus the benchmark show the investment management result before
management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation
moment of the benchmark. Please refer to the prospectus of the funds for further details. The prospectus is available at the company’s offices or via the www.robeco.
ch website. Performance is quoted net of investment management fees. The ongoing charges mentioned in this publication is the one stated in the fund’s latest annual
report at closing date of the last calendar year.-----
16 | ‘Bremain’ or ‘Brexit’?