JP Morgan: Markets underestimate a Brexit

The UK market is not fully considering the impact of a potential Brexit as we move closer to the European independence referendum, says JP Morgan’s David Stubbs.

Despite the overall belief that the UK will most likely stay within the European Union, the market is not pricing in the consequences of a possible exit, says Stubbs, global market strategist for JP Morgan Asset Management.

He says: “I don’t think the market is pricing in the fact that we might leave. Market consequences could be significant.” 

The EU referendum is set to be held by the end of 2017 and the vote was put in law by the EU Referendum Bill earlier this year.

However, there have been suggestions that it could happen in May 2016, to coincide with elections in Scotland, Wales, Northern Ireland and London.

Stubbs says “we will see market movements” a month before the referendum and the possible derating of the UK equity market.

“A Brexit is a real prospect and it is an issue for the UK. This country is going to have a hell of a fight; we don’t know how it is going to be,” he says.

As with the Scottish referendum held one year ago, when sterling lost 6 per cent, Stubbs warns the British currency might again suffer from the political uncertainties surrounding a possible Brexit.

JP Morgan, whose overall view is on the UK to stay within the EU, is not the only asset manager who is concerned about the sentiment surrounding the EU referendum.

Fidelity Worldwide Investment global economist Anna Stupnytska says the potential for a Brexit referendum to be held in 2016 instead of 2017 will “become an increasing source of uncertainty”, and will raise “UK vulnerabilities” in light of the wide current account deficit.

The UK current account deficit narrowed to £26.55bn in the first three months of the 2015 compared to the fourth quarter of 2014, but remains higher than expected.

The UK current account deficit was down from an upwardly revised £28.9bn in the final three months of 2014, but it still represents the equivalent of 5.8 per cent of the UK GDP, according to the Official of National Statistics.

Also, earlier this week, UK inflation slipped into negative territory again in September dropping to -0.1 per cent, suggesting the path for growth and the UK rates hike will remains uncertain.