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EU referendum unveils Sterling opportunity
ETF Securities FX Research: EU referendum unveils Sterling opportunity
Summary
- Gambling odds turn favourable for the ‘remain’ camp as political polls show tight referendum result.
- Adverse economic impact is expected to outweigh regulatory and fiscal benefits of the UK leaving the EU.
- Pessimistic sentiment is at the highest level on record in the FX options market for EUR/GBP. GBP should rebound.
Sentiment turning
According to the latest polls, the gap has narrowed over the past few months in favour of Britain leaving the EU.
The current polling suggests that around 44% of voters will support staying in the EU, with 42% in the ‘leave’ camp, leaving a significant undecided proportion. According to the website oddschecker, the referendum result is likely to be more stark than current polling indicates. Current betting odds across a number of online gambling sites suggest 78% of gamblers are expecting Britain to stay in the EU.
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However, phone and online polling have seen diverging trends in recent weeks. Evidence indicates that when voting intentions are measured and there isn’t a ‘don’t know’ option, most undecided voters will choose the status quo, in this instance, for Britain to remain in the EU. Most internet polls have as a standard option, a ‘don’t know category and that is partially to blame for the divergence in views between internet and phone polls. While phone polls show a generally larger divide between the two camps (in favour of ‘remain’), recent evidence has been showing that the gap is narrowing between the ‘remain’ and ‘leave’ alternatives.
Will history repeat itself?
In 1975, UK voters were given the choice to stay or leave the European Economic Community. Voters were faced with the question, ”Do you think the UK should stay in the European Community (Common Market)?”. The 2016 question is very similar: “Should the United Kingdom remain a member of the European Union or leave the European Union?”
In 1975, the final result showed that there was 67% support from voters for staying in the EC, in line with current estimates ‘remain’ campaign.
Economic impact
The Bank of England have also weighed in on the June 23 vote, noting that growth could be impacted in the near-term. The central bank notes that ‘uncertainty relating to the EU referendum has begun to weigh on certain areas of activity’ with ‘capital expenditure and commercial property transactions…being postponed pending the outcome of the vote.’ The IMF has also indicated that a ‘leave’ vote would be damaging, with its chief economist stating that ‘a Brexit could do severe regional and global damage by disrupting established trading relationships.’
According to a poll by Greenberg Quinlan Rosner, the three most important issues for voters are the economy, immigration and the control of our (UK) laws. While the ‘leave’ camp appears mostly concerned with either burgeoning regulatory framework or immigration, financial markets are focussed on the adverse impact on growth via the external account. The European Union accounts for 45% of UK exports and 53% of its imports. Although the UK has a two year window to re-negotiate trade deals, bureaucrats generally move at snail’s pace. Such a timeframe seems a very tight window for a major project, with government efficiency growth very close to zero. US President Obama has indicated that a trade deal with the US could take as long as 5-10 years to reach agreement and that the UK would ‘move to the back of the [negotiating] queue’. Such comments highlight strong global concerns over the potentially adverse impact on financial stability.
There are modest fiscal benefits expected from not contributing to the EU budget if the UK leaves the EU. Depending on the final relationship of Britain and the EU, the Centre for Economic Policy Research calculates a best case scenario of a 0.31% saving in per capita income, not enough to offset the negative trade effects contributing to a decline of almost 3% in incomes.
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However, any fiscal benefit could be offset by the need to create new administration regarding implementation of new domestic regulation and trade agreements.
HRM Treasury’s own calculations indicate that the UK would be between 3.4% and 9.5% of GDP better off remaining inside the EU within 15 years. The wide dispersion of the GDP range depends on the eventual structure of trade that Britain would adopt with the EU if it left the economic union.
Several economic consultancies have calculated the potential impact should voters decide to leave the European Union. On average a result of a leave vote is expected to make Britain worse off by between 0.1% and 5.5%.i
What’s the FX market saying?
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Against the USD, GBP recently has experienced a modest bounce from multi-year lows. Against the Euro, GBP is hovering at the weakest level in the past 12 months. Negative sentiment is priced in as volatility has weighed on GBP.
Options market pricing is indicating that bearishness is at the highest levels in over a decade for GBP against the Euro.
Volatility is the status quo
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The risk of Britain exiting the EU has seen the cost to insure against a British sovereign default rise by over 100% since the beginning of 2016, another reason for GBP weakness.
Where to next for GBP?
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With so many voters as yet to decide which way to vote, volatility will remain elevated for GBP crosses and will likely keep the pound under some pressure against major currencies. However, such depressed levels of GBP opens up buying opportunities in the medium term as uncertainty fades.
Historically, steep falls in the Pound have presaged strong rebounds. The subsidence of volatility following the financial crisis and the Scottish referendum, led to strong gains for GBP against the Euro. In the four months after the financial crisis, GBP rallied 4.3% against the Euro. Indeed, we expect that the EUR/GBP is the more favourable cross to implement views of Britain remaining within the EU, with the US expected to tighten rates further in 2016 and the ECB keeping the Euro weak with aggressive policy stimulus.
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Recent market movements reinforce the investment case for crypto index investing and we believe that now is the time to build a long crypto exposure via the Nasdaq Crypto Index (NCI) (or to boarden the exposure vs. a single asset Bitcoin ETF position).
Here are some commentaries from our Research:
• NCI surges +18% last week (Nov 3 to 10) while Bitcoin was up +15%: driven by market optimism following Trump’s election and a 25 bps rate cut by the Federal Reserve
• Bitcoin breaks new highs: Closed the week above $80k for the first time, leading a market rally
• Outperformance across NCI constituents:
o Smart contract platforms led gains:
Cardano: +72.6%
Avalanche: +31.4%
Ethereum: +27.2%
Solana: +25.4%
o All constituents (except LTC) outperformed Bitcoin’s gains, see below for last week:
• BTC Dominance tested 60% and retraced: Historically, this has either signaled the end of Bitcoin outperformance or the start of a powerful Altseason
• Strong performance outlook: Momentum in NCI’s broad diversification positions it well for potential long-term gains as macro and regulatory conditions improve
Nasdaq Crypto Index – Constituents performance Nov 3 – Nov 10:
Evolution of Bitcoin dominance:
Why consider Nasdaq Crypto Index (NCI) now?
• Diversification beyond Bitcoin: Capture both Bitcoin’s strength and the upside potential of emerging crypto assets in one allocation.
• Positioning for Altseason: NCI provides targeted exposure to key market segments poised to benefit from broader market growth.
• Current allocation:
One week after the US elections, bitcoin has been hitting new all-time highs. This price action reflects the fact that the results were an ideal outcome for bitcoin and other crypto assets—with both a pro-crypto president and Congress set to take the reins of the US government in January.
The support for crypto was overwhelming. There were 268 Congressional candidates and 19 candidates for the Senate that were elected and are considered pro-crypto, according to Stand with Crypto. This included the election of 50 of 58 candidates supported by the crypto industry.
But with change coming in 2025, what can investors take away from last week’s results? I think there are three things we know with certainty.
- Crypto will continue to be a political force: The election outcome might be the strongest signal we have seen that crypto is an asset class here to stay given the pro-crypto stance of President-elect Trump and many newly elected policymakers. Trump has supported big and bold ideas in this space, including supporting the US holding bitcoin on its balance sheet and the creation of a crypto advisory council to create supportive rules for the industry.
But this election will have an impact far beyond last week’s results. The engagement from the crypto community and industry in this election will reverberate into the next elections and those that follow, as policymakers are now grasping that—like the internet—crypto is a technology that should not be caught up in partisan politics. There were already signs of bipartisan support for the industry this year, but with such a definitive victory for pro-crypto candidates, both Democrat and Republican, the idea that Congress should try and stop this technology from being incubated in the US has faded away.
- The “generational shift” is happening: While there has been more support for crypto from Republicans than Democrats, I think this is a short-term dynamic that will not persist over time. What might be more important is the generational shift taking place, as younger generations of politicians embrace crypto while older generations remain skeptical. It’s not surprising that the most vocal critics of crypto tend to be relatively older, including Sen. Elizabeth Warren (75), Sen. Sherrod Brown (72), and Rep. Brad Sherman (70), while those who are embracing this technology—regardless of party affiliation—are much younger, including incoming US senators Tim Sheehy (38), Ruben Gallego (44), and Bernie Moreno (57). Over time, this generational gap might even become a more important distinction than partisan lines on this issue.
- It’s still early: Even with bitcoin’s rise over $82,000 this week, this is an asset class that is still in its early stages of adoption. Many investment advisors, wealth managers, and large institutional investors are still conducting their due diligence, and we think the political and regulatory environment next year will help them accelerate these efforts.
But we are still so early. And, given the cyclicality of this asset class, there is tremendous potential for this current environment being an excellent entry point. For example, one year after the 2016 and 2020 elections, bitcoin had returned 916% and 354%, respectively.
This performance tracks well with post-halving performance as well as favorable macro factors, such as lower interest rates in the US and economic stimulus in China increasing global liquidity and benefiting risk assets. These factors, along with the ongoing institutional adoption and a dramatically improving regulatory outlook in the US is setting crypto up for a very strong 2025.
Crypto is the election’s big winner
The new administration, together with a Congress more crypto-friendly than any other point in history, is poised to act quickly to ensure that the US maintains its leadership in digital assets. While there will be many uncertainties in the coming weeks and months regarding specific policies and personnel, we are clearly at an inflection point. Crypto has made its case to US policymakers and they have embraced it with open arms. This is a key factor setting 2025 up for what we believe will be an incredible year for this space.
For investors thinking about how to act based on the election results, we continue to advocate for taking a long-term view and getting diversified exposure to this asset class. We’ll continue to face uncertainty and volatility, but investors who maintain an extended horizon will benefit, just as they have in the past.
Notes from our research on recent crypto moves: ideal moment for crypto index investing?
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