The House View Special Brexit referendum: One month to go

Research Deutsche Bank The House View Special Brexit referendum One month to go DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI(P) 057/04/2016 23 May 2016 This report is for Deutsche Bank clients only, not the broader voting public in the UK. Deutsche Bank does not intend to promote a particular outcome to the referendum on the UK’s membership of the European Union. Readers who are eligible to vote in the UK referendum should vote as they personally see fit. Research Deutsche Bank The House View – 23 May 2016 thehouseview@list.db.com http://houseview.research.db.com This report is for Deutsche Bank clients only, not the broader voting public in the UK. Deutsche Bank does not intend to promote a particular outcome to the referendum on the UK’s membership of the European Union. Readers who are eligible to vote in the UK referendum should vote as they personally see fit. The June 23rd Brexit referendum is fast approaching. With just one month to go, the outcome remains too close to call. Polls remain tight, and in any case have been poor predictors of recent UK elections. The referendum could have profound implications on the future of both the UK and the EU. In case of an Out result, the priority will be to negotiate the new UK-EU relationship terms. There are many reasons why this could take longer than the 2 years envisaged in the EU Treaty. During the negotiations, the EU would have to strike a difficult balance between preserving links with the UK and discouraging others from following the UK. The implications of Brexit for the UK and EU economies are difficult to assess, beyond the fact that heightened uncertainty during the negotiation period would weigh on growth in both regions. Markets are pricing Brexit risk to varying degrees. As such, a modest relief rally is likely in the case of a Remain result, with a risk sell-off in case of Leave. Brexit could mean a weaker pound, steeper gilt curves and lower UK equities. As for EU assets, Brexit would likely mean lower core long-rates with periphery underperforming, initially weaker euro and lower equities. The long-term impact is difficult to predict. 2 The House View Special Brexit referendum: One month to go Editors: Marcos Arana, Matthew Luzzetti, Rajni Thakur Table of contents Background How did we get here UK renegotiation of terms with EU State of play Remain and Leave campaigns Polls and bookmakers Implications of Brexit Negotiation period and considerations Future of the EU Macro impact Market impact What is priced in Expected market reaction UK and EU asset views Research Deutsche Bank The House View – 23 May 2016 thehouseview@list.db.com http://houseview.research.db.com In a now famous speech in Jan-2013, PM Cameron outlined key principles for the UK’s EU membership He vowed to renegotiate the terms of EU membership for the UK... −Cameron argued that the government should negotiate a “better deal for Britain” −He also argued that failure to do so could risk a “drift towards [EU] exit” ...and put the result to an in / out referendum – giving the British people a say in the UK’s future relative to the EU The speech and commitment to the renegotiation and referendum were not a call for Brexit −Cameron strongly favoured the UK staying in the EU under improved terms, committing to campaign strongly for this This promise of a renegotiation and referendum figured prominently in Cameron’s campaign for office in 2014-15 3 Back in 2013, PM Cameron vowed to renegotiate the UK’s EU membership terms and put the result to an in / out referendum PM Cameron’s Bloomberg speech, 23-Jan-2013 – Key messages Key challenges / criticisms of the EU Eurozone Single currency area issues are driving fundamental change in Europe Lack of competitiveness Crisis of European competitiveness – much of which is self-inflicted Democratic accountability Increasing gap between EU institutions and EU citizens Principles / vision for new EU Competitiveness Completion of the Single Market for services Improve competitiveness Flexibility Ability to accommodate diversities between member states – “one-size-fits-all” is wrong Sovereignty Stop transfer of power to Europe Power to flow back to member states Democratic accountability Greater democratic accountability and greater role / significance of national Parliaments Fairness Greater fairness for non-eurozone members Source: David Cameron’s Jan-2013 speech, Deutsche Bank Research Research Deutsche Bank The House View – 23 May 2016 thehouseview@list.db.com http://houseview.research.db.com At the start of this year, the UK and EU negotiated a deal that paved the way for June’s referendum The deal addressed the UK government’s demands and is presented by Cameron as a major success Critics say the deal doesn’t go far enough – they argue that: −Some asks watered down, require more detail, or are promises of future Treaty change −There is legal scope for undoing the deal Negoti