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A ‘Britin’ would act as confidence boost for European risk assets

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ETF provider WisdomTree Europe is considering the financial implications of Brexit or ‘Britin’. The firm writes that in their base case scenario, Britain will vote to stay in the EU ('Britin'), if only because few in the UK would want uncertainty to potentially undermine the hard fought return to economic stability.

“Consider the late recovery in the UK’s labour market, which meant that incomes only started to meaningfully improve from 2014. As a result, the tangible gains of the economic recovery for UK households have only recently emerged. Following years of decline, the regular average pay of workers employed in the private sector has reversed and has begun to outpace inflation only after the unemployment rate fell back to pre-financial crisis levels.”
 
WisdomTree Europe looks to the case of the Scottish independence referendum held in 2014, when elderly voters concerned about social security and the young concerned about employment tilted to vote in favour of Scotland remaining part of the UK and the end result was that concerns over national identity were side-lined for securing broader economic prosperity.
 
“Given the hard fought economic gains by Britain over the last several years, coupled with the fact that the EU remains the UK’s largest trading block (a fact which is compelling UK businesses to overwhelmingly support ‘Britin), similar voting behaviour looks likely,” the firm writes. “In this context, British voters would vote with their pockets, preserving the status quo of that of an imperfect union with continental Europe. With political and economic uncertainty removed, the ‘Britin’ result should restore confidence in sterling assets and also provide a boost in the euro. Credit conditions should continue to ease and in the process keep the domestic demand recovery of Europe alive.”
 
WisdomTree Europe recommend that European small cap equities are seen as likely to benefit the most, alongside UK mid and small-cap equities that have a relative large exposure to Europe.

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