As we approach the UK referendum on EU membership, two of our senior portfolio managers, Simon Down and Holger Mertens update the current situation, what factors may sway what appears to be a very close vote and the practical issues that would likely occur if there is an exit vote.

This follows on from their original piece that was published in March:

Scones or Croissants? Brexit: The Route to Exit and Key Risks - 24 March, 2016

http://www.nikkoam.com.sg/articles/2016/03/scones-or-croissants-brexit-the-route-to-exit-and-key-risks

The Polls: What to make of current polling

Recent polling has been quite volatile and is likely to remain so until the vote, with UK assets, and especially the pound, fluctuating on the changes in various polls. One significant issue remains the large difference between telephone and internet polls, with telephone polls generally showing a significant lead for Remain and internet polls generally showing a small lead for Exit. When a group of telephone polls are released in a short period, there are outcries that Remain is suddenly in the lead, whereas when there are few telephone polls being released, sentiment shifts to the belief that Exit is gaining traction once again. In reality, little has changed except the type of poll that has been published. Additionally, as internet polls are significantly cheaper to conduct, they are greater in number, while telephone polls are more sporadic.

Average of Last 6 Polls

Average of Last 6 Polls

Source: What UK Thinks

Why do telephone polls and internet polls yield such different results? YouGov has conducted its own research into this issue and its conclusion is that ‘we can reveal a real, significant and evidence-based difference between the two methodologies that explains why they are divergent and why it is online that appears to be calling it correctly.’ The reason for the difference appears to come down to a mismatch in education levels between the two types of poll, with telephone polls having a much larger proportion of people with college-degree level education than the population as a whole. To test this conclusion, YouGov ran a simultaneous online and telephone poll but then applied an educational filter to bring the telephone poll into line with the population average. This resulted in a 2% lead for Exit in the online poll and a 3% lead for Exit in the telephone poll. Thus, depending on whether you accept YouGov’s analysis, it appears that both telephone and online polls, when sampled correctly, would indicate a very tight split between the Exit and Remain camps.

Taking a deeper dive into the polls, it is possible to see the key factors for voters. For those saying they will vote to Remain, it is clear that the overwhelming factor is “jobs, investment and the economy.” For Exit voters, the overwhelming factors are sovereignty and immigration.

Most Important Factor Remain Leave Don’t Know
Better for jobs, investment, economy 55% 7% 24%
Likely to strike better balance between acting independently and co-operation with other countries 19% .041% 29%
Likely to help us deal better with immigration 3% 36% 17%
Likely to get rid of David Cameron as PM 2% 6% 4%
Likely to maximise British Influence in world 6% 2% 2%
Something else 9% 5% 5%
None of these 6% 3% 19%

Source: YouGov

Betting: What to make of betting odds

The betting odds for Brexit sank to as low as 15% several weeks ago, but have now risen sharply. However, how much confidence should we have in these odds as an accurate predictor? Firstly, it is important to understand that betting odds are largely dictated by weight of money rather than a sophisticated analysis at betting companies themselves. Matthew Shaddick, head of politics-trading at Ladbrokes has provided an interesting insight into betting trends at his company. The chart below shows the swing in betting patterns in recent weeks, but another critical piece of information is the amounts being bet. At Ladbrokes, the average bet for Remain is $476 whilst the average bet on Exit is $72. This average amount for Remain betting is likely to be heavily biased though by a number of very large bets.

Regarding the Scottish independence referendum, it is interesting to go back through the news stories about those who placed bets on the referendum. This highlights a new phenomenon of regular people who make very large bets on events as a short term investment rather than a small gamble. One anonymous British man, for example, placed a £900,000 bet on the Scottish referendum to win just under £200,000 stating: “I'd prefer to call this a reasoned wager. For me it was almost an investment”. We are unlikely to hear similar stories regarding the EU referendum until after the vote, but we do know from William Hill that they have one female customer who apparently bet £100,000 with them for the UK to remain and that this is apparently the first time she has ever placed a bet on anything. This suggests that the early betting could have seen similar ‘investors’ dominating the market before a huge surge in smaller Exit bets in recent weeks.

Ladbrokes: Proportion of bets for Exit

Ladbrokes: Proportion of bets for Exit

Source: Ladbrokes

The View of Holger Mertens: Why the vote may sway towards Remain

With the polls so close and the betting odds potentially questionable, what could sway the electorate as we approach the vote? The outcome of the Scottish independence referendum, as well as the last general election was poorly forecasted by most polls. However, perhaps it wasn’t the polls that failed, rather, a “decision cycle” of voters developed.

At an early stage of a cycle, a voter will approach the decision and the possible consequences more from a theoretical point of view, mainly considering the long-term implications for the country. Among the top themes discussed at this stage, with regards in to the Brexit referendum, were immigration, overregulation from the EU and sovereignty. But as election day approaches, the focus for most individuals will move more towards the personal implications.

As seen during the Scottish referendum, the last polls were the most accurate and a recent survey by Michael Ashcroft revealed that for 58% of the asked people about Brexit, the final decision will more likely be driven by instinct, rather than facts, at the last minute. This implies that on the night before the vote or even in the polling station, people will assess what short-term consequences the vote will have for their personal life rather than long-term potential political implications.

After the Scottish vote, almost 50% of the people that voted for Remain said their reasons were job security, currency value and EU membership. The explanation for this behavior is clear. No one can accurately predict what the future in or out of the European Union will bring for the UK on a longer-term basis, but it is easy for most people to evaluate the status quo of their personal life and the possible short-term consequences of a Brexit.

Well flagged by think-tanks, such as the IMF and the Bank of England, a weakening of the currency and the housing market, as well as reduced job security, would affect most everyone’s daily life. Michael Bloomberg, the American media entrepreneur, recently revealed that based on feedback from his clients, he will have to move part of his operations from London to Paris and Frankfurt, as his clients will move on after Brexit. It will likely be this kind of message that will remain in most people’s minds when voting.

In addition, one of the lessons from the Scottish referendum, according to the economist Justin Wolfers, was a higher accuracy about the outcome was achieved by asking people about what they thought the outcome of the referendum will be, rather than asking them how they plan to vote, and in this light, according to another Ashcroft poll, nearly two-third of voters think the UK will remain in the EU.

The View of Simon Down: Why the vote may sway towards Exit

For the Exit camp, it is not necessarily important to obtain additional momentum towards its position in order to win the vote; rather, it is more important to retain their vote as best as possible and then rely on the demographic skew amongst voters, which lies in its favour. The Exit side is heavily favoured by older voters, 65 and above who, in normal elections are much more likely to vote than the 18-35 bracket, which is the core age bracket for the Remain vote.

95% of those aged 65 or above are registered to vote vs. 60-70% of under 35’s. The leave camp, thus, has a solid core of older voters who are unlikely to change their mind in the run up to the vote. Only 7% of those saying they will vote to Exit believe that the UK economy will be worse off with 47% believing that it will be better off and 43% believing it will make no difference. Only 2% believe that an Exit would be bad for jobs with 45% believing it will actually be good for jobs. The overwhelming drivers of the Exit vote are, thus, not about the economy, but about sovereignty and immigration, which are long term issues that will not change for the better in the coming weeks.

YouGov has published an interactive guide to how it estimates the vote will develop at different levels of turnout and based on different poll leads for Remain. As the turnout for older voters is reasonably stable, the overall turnout is disproportionately decided by the turnout of younger voters. For example, even with polls showing a 2% lead for Remain going into the referendum, if turnout is 70% or below, then the likelihood is that the country will vote for Exit. Even with a 4% poll lead going into the referendum the Exit vote would be expected to win if turnout was less than 60%. Given that the turnout at the last general election was 66.1% and only about 80% of voters are registered to vote, this shows what a challenge the Remain camp has to win.

% Point Lead of Remain Vote in Polls Before Final Vote

Source: YouGov

What is worrying for the Exit camp is that there has been a late surge in registration with around 1.5m people registering to vote in the final weeks. This has resulted in the time for registration being extended by 24 hours after the registration website crashed in the final hours before the registration deadline. Around half of those registering were below the age of 35 and this could result in a higher turnout if they vote.

Key Events Which Could Sway Opinion

Obviously, an unexpected event such as a terrorist attack or a sudden resurgence of the refugee crisis could trigger a change in sentiment. More predictable events will likely revolve around the televised debates. Indeed, any of the below debates could be looked back on as a key moment which turned opinion towards one side:

Date Program Involved Parties
9th June ITV Referendum Debate Panel debate expected to include Nicola Sturgeon (Remain) and Boris Johnson (Exit)
15th June Question Time: EU #01 Michael Gove (Exit) vs. Audience
19th June Question Time: EU #02 David Cameron (Remain) vs. Audience
21st June The Great Debate Boris Johnson (Exit) to debate London major Sadiq Khan (Remain) at Wembley Arena
22nd June The Final Debate No announced line up as yet by Jeremy Paxman (host)

Practical Issues Surrounding the Vote and if the UK Exits

On the day of the vote itself (23rd June), there will be no official exit polls for the referendum. Normally, UK broadcasters jointly fund an exit poll but have agreed not to do so for the referendum because of the difficulty involved in running such a poll. In general elections, polling companies know the previous voting results for individual polling stations, so they are able to target a small number of polling stations, perform an exit poll on random samples of people throughout the day and then use these results to judge how the voting has changed at those sample polling stations. These are then extrapolated to a national level to attempt to estimate how the nation has voted.

In a referendum, especially on such a major issue, this is impossible as there is no previous history to which to compare the samples or even much idea as to which polling stations may be good targets for data collection. Hedge funds and banks are rumoured to be commissioning independent polls but there are now calls for this to be banned. It is also very unclear as to how effective these polls would be anyway. Attempts to change existing methods for exit polls and use random sampling have been tried before at general elections and been quite inaccurate.

This means that the first idea of the results will come as local counting areas declare their votes. The UK electoral commission asked Counting Officers around the country to provide estimates of when they expect counting to be complete and the earliest are 11.30pm, but with most between 1am and 2am on the morning of the 24th June. There will be speculation on the result as soon as local counting areas start to declare and the picture will develop throughout the night. The final result will then be declared on the morning of the 24th in Manchester. If the country votes to Exit, then Prime Minister David Cameron has stated that he will immediately invoke Article 50 of the Lisbon Treaty under which members of the EU start the process of negotiating to leave. There is then a period of negotiations that can last up to two years under which all existing treaties apply and during which the nature of the UK’s exit will evolve.

Since we wrote our previous piece, the Exit camp has now solidified its vision of a post Exit world and these include two extremely important policies. Firstly, they have committed to an Australian style points system targeting around 100,000 net immigrants per annum (vs. 330,000 now). This would mean no free movement of labour with the rest of the EU. Secondly, they have committed to spending the contributions currently being made to the EU on the National Health Service. This would mean no contribution to the EU budget. Both of these are red lines for the EU and will make negotiations more difficult, ruling out the UK following the route of Norway or Switzerland. The immigration cap of 100,000 net people per annum would affect both EU and non-EU migrants, with non-EU migrants actually a larger contribution to net migration than EU migrants.

All Citizens British EU Non EU
Immigration 630,000 83,000 270,000 277,000
Emigration 297,000 123,000 85,000 89,000
Net Migration 333,000 -39,000 184,000 188,000

Source: Migration Watch

Just looking at EU migrants, the trend of migrants from Eastern Europe and the Baltics has actually declined from the 2007 peak and is relatively stable now. There has been a significant pickup in entrants from Bulgaria and Romania since those countries gained entrance to the EU, whilst there has also been a sharp increase in migrants coming from core EU countries, as high youth employment in countries such as Spain and Italy has pushed younger people look for opportunities in the UK.

(Thousands of people)

Net Migration to the UK from EU

Source: Migrationwatch

Conclusion

As we enter the final stages of campaigning, we believe that either side could win the vote. The challenge for the Remain camp will be to ensure that its turnout is high. Key to this will be whether personal implications of the vote become more important in the final days before the election, with short term financial worries overwhelming longer term considerations.

If the UK does vote for Exit, then the hardline stance of the Exit campaign will make negotiations with the EU difficult and will put the EU in a difficult position. If it accepts that the UK does not need to have free movement of workers and does not have to make a contribution to the EU budget, then other countries will certainly want the same deal. But if the EU doesn’t accept this and chooses to impose tariffs on UK goods, then it is likely to lose a valuable customer for some of its major firms, as the UK imposes counter tariffs. An Exit vote will almost certainly impact global financial markets and a number of banks have stated that they would reduce operations in London on an Exit vote.

In the medium term, though, the largest risk is not from the UK leaving the EU, but of the whole EU starting to fragment and potentially break apart. YouGov recently conducted a poll across a number of European countries asking the question of whether it is likely or unlikely that other countries will also choose to leave if the UK exits. The results could well be an indication of which countries are most likely to follow a UK exit, with Sweden, Denmark the front runners. Norway although not part of the EU, could also revisit the deal that it has with the EU if the UK is granted better terms. YouGov have also conducted more direct polls in some core European countries to gauge domestic support for leaving the EU and these polls suggest that the populations within the largest economies remain very committed to the EU with only 29% of Germans and 31% of French voters against the EU.

Poll: If Britain leaves the EU is it likely or unlikely that other countries will also choose to leave?

Poll: If Britain leaves the EU is it likely or unlikely that other countries will also choose to leave?

Source: YouGov

In sum, clearly, much of the world’s future rides on the UK’s vote and the details of what could be a very messy divorce.