Forget A Grexit; What About A Brexit?

A new report by UBS analyst David Tinsley explored the possibility of a U.K. exit from the eurozone. Tinsley believes that a referendum on a U.K. “Brexit” could come as soon as 2016.

Timing

According to the report, the most likely timing of a referendum would be October 2016. “The time for the market to start preparing for this is now, given it could have a potentially significant impact on asset prices and volatility, not to mention the real economy,” Tinsley cautioned.

Outlook

UBS sees a real possibility of U.K. voters choosing to leave the eurozone, but the firm believes that the most likely outcome is that a compromise will be worked out, providing more favorable eurozone membership conditions for the U.K.

In that scenario, U.K. equity markets might demonstrate a pickup in volatility approaching the referendum date, but the long-term effects on equity prices should be inconsequential.

Related Link: Will Cameron's Diplomacy Avoid A Brexit?

Brexit Scenario

If British voters do choose to leave the eurozone, Tinsley explained that the nature of the exit will be critical for British investors. A “hard exit” could mean that the U.K. would lose access to trade in goods and services and would see a reduction in migration. Tinsley sees this scenario having a significant negative impact on U.K. GDP.

Financial Sector

According to Tinsley, the financial sector could be hit hard by a eurozone exit, especially if the U.K. loses financial regulatory influence as a result.

This loss of influence would likely not bode well for the share prices of U.K. banks such as Barclays PLC (ADR) (NYSE: BCS), HSBC Holdings plc (ADR) (NYSE: HSBC), Lloyds Banking Group PLC (ADR) (NYSE: LYG) and Royal Bank of Scotland Group PLC (NYSE: RBS).

Disclosure: The author holds no position in the stocks mentioned.

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