Forget Grexit-What About A Brexit?

• UBS believes that the U.K. could vote on exiting the Eurozone in 2016
• Although an exit is possible, UBS believes that a compromise that keeps the U.K. in the E.U. is more likely
• A “hard exit” from the E.U. could be devastating to the U.K. economy

A new report by UBS analyst David Tinsley explores 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 is 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 cautions.

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 that will provide 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.

Brexit scenario
If British voters do choose to leave the Eurozone, Tinsley explains 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 Bank BCS, HSBC HSBC, Lloyds Banking Group LYG and Royal Bank of Scotland RBS.

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