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 A vote for European balance

A vote for European balance

Stay in EU, watch sterling climb

by Thanos Papasavvas

Tue 31 May 2016

The UK is likely to stay in the European Union after the 23 June vote. So I have been backing a contrarian positive outlook for sterling since its lows in March, when disquiet about a British exit was at its height.

My view on the pound is partly based on valuation terms, which have historically proven very resilient at levels near or below $1.40. Another factor is the relative resilience of the UK economy. Even though sterling has recovered in the past two months, there is some probability of ‘Brexit’ already in the price. So a referendum Yes to the EU could see sterling rallying back to $1.55 and above €1.40 in the short term.

Given medium-term concerns over the trade deficit, I do not foresee the pound appreciating much further than that for now.

Should the UK vote to leave, sterling volatility would rise to new highs but the currency would not drop cataclysmically. The UK and its European partners would have an interest in reaching an amicable resolution that threatens neither the UK's economic stability nor the delicate balance of the entire EU.

From the point of view of world trade, Britain’s interest would appear to lie firmly in staying within the EU. International trade and international trade finance are growing extremely slowly. Even on a cautiously optimistic basis, both indicators are unlikely to rise at more than a fraction of pre-crisis rates of 15-20% annually.

This would not be a propitious moment to cut loose from the EU in favour of a new focus on non-European markets. Assuming the UK votes to stay, by 2020 sales to the EU, on Equant Analytics estimates, will still represent the largest component of the country’s total exports, at 43.8%. The share of exports to the larger emerging market economies – Brazil, Russia, India, China and South Africa – will still be fairly modest at 10.1%, while that with Anglophone countries, led by the US, is expected to be 14.9%.

The global outlook remains uncertain, even though I am more optimistic than most about overall prospects and expect both US and Chinese growth to surprise on the upside. Chinese data have improved slightly, supported by an improved trade position and currency weakness.

Europe's fragile economic and political equilibrium has been overly dependent on a balancing act performed by one person, German Chancellor Angela Merkel. A British exit, or indeed Merkel's own departure if she went precipitously, would cause Germany and Europe to face complex realpolitik challenges of the kind that confronted Otto von Bismarck, Germany’s legendary chancellor in the 1870s and 1880s. The best outcome for European stability would lie in the UK remaining inside the EU.

Thanos Papasavvas is Co-Founder and Chief Investment Officer of Equant Analytics, and a former Head of Currency Management at Investec Asset Management and Credit Suisse Asset Management. This is No.74 in the series – the 100th article will appear on 23 June.

OMFIF’s series on the UK EU referendum presents a wide variety of perspectives from Britain and around the world ahead of the 23 June poll. We are assuring a balance between many different points of view, in line with OMFIF’s overall neutral stance on the issue.

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