Brexit: “Remain” Struggling Dangerously

Published on June 10, 2016
SGH Insight
Perhaps most dangerous of all for the Remain camp, with only two weeks to go to the polls, we believe could be the spate of recent high profile defections from the Labour party, ostensibly strongly pro-Remain despite widespread suspicions over the true sympathies of its leader Jeremy Corbyn, to the Brexit side.

And while market participants take solace in betting lines that have consistently shown an overwhelming lean to Remain, these should be treated with caution, as the odds are reflective of bet size, and the typical Remain vote bet is much larger than the Leave vote.
Market Validation
(Bloomberg 6/24/16)
The Stoxx Europe 600 Index sank 7 percent at the close of trading, joining a global market selloff as 52 percent of U.K. voters opted to leave the European Union and Prime Minister David Cameron resigned. The FTSE 100 Index fell 3.2 percent, trimming a slump of as much as 8.7 percent as exporters gained amid a plunge in the pound to 30-Year Low as U.K. Stocks Slide on Brexit Sterling slumps below $1.35, weakening as much as 11%.Treasuries surged, pushing benchmark yields down the most in seven years, as Britain’s surprise vote to leave the European Union drove a rush for the safest assets.

Key takeaways:

Overall we still lean towards Remain winning, but as things stand with only the slimmest degree of confidence.

The momentum has turned to Brexit, and UK Prime Minister David Cameron has been unable to turn that tide. With a mere two weeks to spare, that trend will need to reverse for the UK to remain in the EU.

Remain votes from Northern Ireland, British expatriates, and especially among the recent surge of new voter registrants may tip the balance of the June 23 vote to Remain.

One of the more baffling aspects of the Brexit debate in the UK up to now has been just how ineffective the “Remain” campaign has been: it has lost every round of the just concluded series of televised “debates” between Brexit and Remain supporters, culminating with a disastrous showing for the Remain camp yesterday by Labour MP Angela Eagle, who among other things appeared to have struggled mightily to coherently define her vision of national “sovereignty.”

And the polls had before that already been moving in the wrong direction for Remain, narrowing to a dead heat tie.

So on that note, a few observations:

** Some of this narrowing can be explained by efforts by pollsters to adjust for expected turnout and overrepresentation of Remain voters in phone polls, and consensus is still that Remain will regain momentum in the final push as undecideds and newly registered voters break for the status quo. But only part of the trend is due to a change in methodology — there has been a real erosion of support for Remain — and these polls do not yet even capture the results of Remain’s poor showing on national TV.

** Perhaps most dangerous of all for the Remain camp, with only two weeks to go to the polls, we believe could be the spate of recent high profile defections from the Labour party, ostensibly strongly pro-Remain despite widespread suspicions over the true sympathies of its leader Jeremy Corbyn, to the Brexit side.

** Most notable of these was last night’s announcement by MPs John Mann and Dennis Skinner that they will vote Brexit. This could generate exactly the opposite momentum to an undecided electorate that is widely assumed to vote for the status quo.

** And while market participants take solace in betting lines that have consistently shown an overwhelming lean to Remain, these should be treated with caution, as the odds are reflective of bet size, and the typical Remain vote bet is much larger than the Leave vote.

** Ladbrokes, for instance, reports the average bet size on Remain is £415, while for Leave the average bet size is £68. That would translate into an 86% weighting towards the Remain vote if there were exactly equal number of bets for both sides.

** Against that seeming tide of grim news, mainstream Tory officials in the Remain camp do not feel all is lost yet, and note that while polls have shifted towards the Brexit camp, they may underrepresent 1.2 million registered voters in Northern Ireland as well as 200,000 British expats living in the EU who are registered to vote. Both groups are overwhelmingly in favor of Remain.

** Turnout in Northern Ireland and among expats is typically lower than the national average, but this time around both constituencies clearly have an enormous amount at stake. It is no coincidence that former Prime Ministers Tony Blair and John Major landed in Derry, Northern Ireland, yesterday to drum up support for Remain.

** Crucially, Tory sources believe this means the Leave camp may need to head into the last week before the June 23 vote with a 2-to-3 point advantage to compensate for this, as well as for the assumed tendency for undecideds at the last minute to break for the status quo.

** And on that front, the last minute voting registration push that has netted a whopping 1.5 million new registrants in the last seven days, is also slightly favorable to “Remain,” based on the assumption the bulk of new registrants are coming from the younger, pro-EU demographic.

** Early figures estimate that 56% of these registrations were under the age of 35, 35% between 35 and 55, and only 9% above the strongly anti-EU 55 plus demographic (who are a high turnout group and are ostensibly largely registered already).

** It is by all accounts a slim basis for confidence in a Remain victory, as the Prime Minister and Remain camp are clearly on the ropes. To turn more undecideds, we are told Cameron may promise if he survives this vote to give UK voters a referendum over any future EU enlargement (e.g., Turkey).

** The risk to making that promise is that Remain (and PM Cameron) has lost badly already – and cannot win – on immigration and EU expansion, and strategists are urging the PM to keep the Remain message as focused on economic issues as possible and to avoid what to them has become a clear “third rail” of immigration.

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