British Prime Minister David Cameron’s recent re-election and the Conservative party’s convincing win has ignited concern that Britain is poised to leave the eurozone.
Mr Cameron has promised a referendum on Britain’s membership to the European Union within 18 months, and if the vote results in a ‘Brexit’, it will spark market volatility, said Perpetual Investments head of investment strategy Matthew Sherwood.
Speaking to InvestorDaily, Mr Sherwood said: “In the scheme of things it’s going to be one very large uncertain event.”
“If [the Conservative party] is starting to take steps to exit from the union, there will be heightened uncertainty in terms of trade agreements and financial agreements – and one thing markets don’t like is heightened uncertainty.”
A Brexit is a “much larger risk [of] occurring that’s probably being priced in at the moment,” he said.
Such uncertainty will influence equity markets, as in times of uncertainty, investors prefer the safety of fixed income securities relative to shares, Mr Sherwood explained.
European export orientated companies domiciled in the UK will also suffer.
British firms will be faced with trade barriers with their largest customers, Mr Sherwood said.
The British government will have the challenge of renegotiating both trade and financial agreements with Brussels.
“If Britain elects to leave the European Union, what sort of risk does that place to Britain in terms of being the financial hub of Europe?” Mr Sherwood added.
A withdrawal from the European Union will question Britain’s global economic influence.
“I think it would probably lessen their voice in global matters whether they be geo-political or geo-economic,” said Mr Sherwood.
“If Britain left the European Union it would certainly be a change of era.”
A Brexit, like the Greek Grexit, is another example of the increasing interrelatedness of politics and economics.
“There’s no doubt that macro policy and markets are becoming almost perfectly correlated,” Mr Sherwood said.
“In the end, policy deliberations on the macro front are having a very large impact on markets."
Mr Sherwood concluded that the likeliness of a Brexit will hinge on 10 Downing Street.
“If [the Conservative party] is pro-exit, or pro-out of Europe, I think the odds will grow exponentially that the vote will be passed,” he said.
“In the end there are a lot of unknowns and in the end the uncertainty is going to rise.
“It will be destabilising for markets if it’s not treated with the respect it deserves,” Mr Sherwood said.
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