Brexit will not be a 'Lehman moment': UBS

Singapore

THERE is a lot to lose should the United Kingdom (UK) leave the European Union, but it will not be a "Lehman moment", said UBS analysts.

They are expecting Britain to remain in the EU, but see a "one-third or a one-quarter probability" of an exit. The London-based analysts, however, said that should the shock exit occur, policymakers around the world have made safeguards to prevent it from rattling markets.

Thus, the fallout from a "Leave" vote, or "Brexit", will be somewhat contained, they added. They were speaking to the media across Asia-Pacific via a conference call on Wednesday. "Given the tools available to central banks today, we are not close to a Lehman moment," said Bill O'Neill, head of UBS Wealth Management's UK Investment Office.

These analysts' comments echo remarks by US Federal Reserve chair Janet Yellen. She said on Tuesday that while Britain's leaving the EU will have severe repercussions, she did not expect the US economy to fall into recession.

Mr O'Neill was drawing comparisons between Brexit and the bankruptcy of Lehman Brothers in 2008 which ignited a financial storm and later, a global recession.

Since the global recession, some economies have regained some vitality, but others have yet to walk out from a low growth environment. Hence, central banks around the world have kept interest rates low to spur growth.

But markets have been contending with the prospect of Britain leaving the EU of late.

Recent opinion polls, however, have mostly shown a shift towards keeping Britain in the EU. On Monday, global stock markets rallied and the British pound strengthened against the US dollar. This meant that markets are now also predicting that the outcome of the referendum will see Britain remaining part of the EU, said the UBS analysts.

With such a view, a "Remain" vote will have a muted effect on markets because "it's been anticipated and it's status quo". They predict that UK equities would rally by up to 7 per cent in the near term, though.

An exit, however, will definitely upset markets, they said. Most of the disruption will be "front loaded" as negotiations for the UK to leave the EU may take more than two years to materialise after a "Leave" vote, they noted.

In the near term, a "Leave" vote could lead to the UK stock market falling by 12 per cent or possibly more. The pound will also take a pounding, the analysts added. It could fall 5 per cent in trade weighted terms shortly after a vote to leave is confirmed.

Longer term, the house sees the pound to US dollar rate heading to 1.20. The British currency will also in the longer term decline 25 per cent from the highs of November 2015. The Bank of England will also cut its rates to zero by the end of the year, they added.

Polling stations will open at 7am on Thursday in the UK, and close at 10pm.

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