Of Swans, Guardians and Suns…

2016 continues to provide evidence of significant volatility in many areas, with tin hats being much in evidence as the chapeau de jour, while swans of ever-darkening hue are supposedly seen with increasing frequency.

The term “black swan” has now become a cliché, together with “unknown unknowns” and can lead to much unnecessary and fruitless intellectual effort, as well as avoidance of responsibility for the foreseeable consequences of actions, or the occurrence of identifiable tail risks.

So, consider these related questions:

– If the United Kingdom holds a referendum on whether or not to remain part of the European Union, what will be the outcome; and
– If the result is a vote to leave, what are the potential consequences?

Even a year ago, these might have seemed rather abstract tail risks, but they are not, and never were, “black swans”. While the precise timing of a UK referendum may not yet be set, it will probably happen before the end of 2016; and the wording of the single question on the ballot paper will be intended to elicit a straight “up or down”, “Yes” or “No” outcome, as the Electoral Commission has made it very clear that it will not permit a gerrymandered wording.

As the result of the Scottish secession referendum showed, polls on attitudes and voting intentions can be quite wrong in predicting outcomes. However, a recent YouGov analysis of the voting intentions of a 22,000 voter sample showed that, at present, the split of voting intentions is 51/49 remain/leave. Not surprisingly, when the members of the cohort are placed into various sub-categories, there are very wide differences. As an example, for readers of the Guardian newspaper (generally regarded as “socialist” in the European sense), the split is 76/24, while for readers of the infamous Sun newspaper it is 40/60.

Clearly, how the “Yes” and “No” political campaigns are argued and conducted is likely to have some influence on the outcome, as is what happens with and in the EU as a whole during the referendum period. In reality, it is likely to come down to whether or not, on balance, those who vote decide “better the Devil you know, than the Devil you don’t”. As the FT’s Martin Wolf has stated: …”the referendum will ultimately be decided by fear, hope and, not least, trust.”

If the outcome of the vote is “Yes”, it is likely that there will be a dampening in market and political volatility. If it is “No”, the consequences for the both the UK and the EU would seem to be mainly negative.

At Awbury, our focus is, as always, on understanding and analyzing the potential risks (and opportunities) that would flow from either outcome. For example, what if Prime Minister Cameron is compelled to resign and the governing Conservative Party fragments? Or, the EU decides to “make an example” of the UK “pour encourager les autres” in terms of how it imposes exit terms? And yet, the loss of an influential Member may well de-stabilize the entire EU, making concerns over the “loss” of Greece a sideshow, as well as encouraging secessionist forces both within and outside the UK, threatening an end to Europe that began to be created almost 60 years ago after the signing of the Treaty of Rome.

We shall be keeping a close eye on this issue; and will, no doubt, write further about it.

The Awbury Team


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