On Thursday, British citizens will vote on whether or not they want the UK to remain a part of the European Union (EU). This is the UK referendum, aka the Brexit vote.
For the most part, experts have reassured clients that even if the UK voted to "leave," the process would take at least several years. And despite it being one of the more publicized global events of the year, experts have pointed out that the US economy and the US financial markets have very little direct exposure to the UK.
Nevertheless, the whole process has been a source of great uncertainty. And the prospect of the "leave" vote winning, could be a source of even greater uncertainty. And uncertainty means greater risk premiums, which should translate into lower prices for risk asset classes like stocks and corporate bonds.
The consequences of a 'full Brexit' will be bad
First, it's important to note that the referendum is just advisory. It's not legally binding. But it certainly reflects the public's sentiment, which would likely force policy makers to invoke Article 50 of the Treaty on European Union which officially separates a member nation from the EU over a two-year period.
In a new research note, Credit Suisse analysts discuss what would happen if Britain voted to Leave and also invoked "Article 50."
"Into a full Brexit scenario, our FTSE 100 year-end target would fall to 6,200 from 6,600," Credit Suisse's Andrew Garthwaite wrote. "We would also take our S&P 500 year-end target to 2,000 from 2,150, and our Euro Stoxx 50 target to 2,950 from 3,350."
The S&P 500 closed Tuesday at 2,081.
For Garthwaite and his team, it's not just about the Brexit. Rather, the Brexit could trigger a turn in a stock market that's already being supported by fragile fundamentals.
"Our key concerns with regard to equities are: i) equities are overall priced at fair value; ii) we forecast almost no US earnings growth; and iii) there is unusually high political, economic and business model risk at a time when governments are trying to redress the imbalance between owners of capital and labour," he added.
We'll know whether any of this is of serious concern once the votes are tallied early Friday.
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