- U.K. referendum not ‘systemic’ issue, says Pimco’s Balls
- On the other hand, Fiorini sees event as ‘unhedgeable’ risk
A constellation of global movers and shakers has warned Britons not to vote to leave the European Union. Economically, politically and diplomatically, the island kingdom will be weaker on its own, luminaries such as Barack Obama, Angela Merkel, Mario Draghi and David Cameron have said.
But as the pound bears the brunt of the anxiety in the neck-and-neck campaign before the June 23 referendum, some investors are taking it all in their stride.
Take Andrew Belshaw, a money manager for Western Asset Management in London, which oversees $436 billion. While Belshaw, who said he expects the nation to vote for the status quo, prefers U.S. and European assets, he said the vote won’t matter much for the Britain’s economic future in the long term.
“In the long run, I don’t think it makes that much difference,” Belshaw said. “Fundamentally, what drives economic performance is productivity, labor force growth, innovation, investment in education” and those aren’t likely to be affected by a potential Britain’s departure from the 28-nation bloc, he said.
If the U.K. leaves, Belshaw said he expects any market panic to be contained. There is likely to be immediate reaction from central banks to stabilize markets, as well as a timeline from political leaders in the EU and the U.K. for the exit negotiations, he said.
To be sure, the debate on risks and rewards of leaving the European community, which Britain joined in 1973, has divided not just the country and its allies, but investors and even the ruling Conservatives. Boris Johnson, the former Tory mayor of London, is leading the Brexit campaign against Prime Minister Cameron. Chancellor of the Exchequer George Osborne warned this week of tax increases and spending cuts in the event of a vote to leave.
The increased support in polls for the “Leave” campaign has pushed down the pound and European stocks, and sent government bond yields from Japan to Australia to Germany to record lows as investors sought the safest assets. Still, Bank of America Corp.’s Global Financial Stress Index indicates investors aren’t preparing for a systemic event. While the measure has climbed to 0.7, the most since February, it’s short of the 1.31 reached in 2011, and 3.01 during the financial crisis of 2008.
“There are hyperboles on both sides, and I think it’s much more nuanced than that,” Belshaw said. “The U.K. growth rate has been pretty consistent at around 2 to 3 percent since the Second World War, it hasn’t varied no matter what exchange-rate regime we’ve been in, whether we’re in a post-war austerity period or under a liberal market agenda in the 80’s. I doubt this will change if we leave.”
To others, the nonchalance is ill-founded.
Fabrizio Fiorini, chief investment officer at Aletti Getielle SGR SpA, which oversees $18 billion, predicts turmoil similar that which followed Lehman Brothers Holdings Inc.’s bankruptcy in 2008 if Britain votes to leave.
“The risk in the event of Brexit is so big it’s unhedgeable,” Fiorini said. “The impact could be as big as the collapse of Lehman Brothers, and I think the market has underestimated that.”
For Fiorini, the market turbulence will unfold like this: A vote to leave would result in an exodus to the dollar. The strength of the dollar will then hit China, sap commodity prices and lead to disruptions in emerging markets. The trouble will then ripple through the global economy at the time when central banks are running out of policy ammunition to counter the economic headwinds.
Still, the fund manager is betting on an advance in sterling, anticipating Britain will vote to remain in the group.
The “Remain” campaign has also got support of high-profile world leaders, with Germany’s Merkel making her strongest intervention in the debate so far in early June and warning that the U.K. would be isolated and lose influence if it leaves the EU. Meanwhile, the EU’s president Donald Tusk has gone as far as saying that it could spell the end of “western political civilization” itself.
To Andrew Balls of Pacific Investment Management Co., one of the world’s biggest money managers with $1.5 trillion of assets under management, some naysayers have gone too far.
Brexit isn’t a “systemic” issue, he said at a briefing earlier this month.