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Why a Brexit might not bother emerging markets

If the U.K. votes to leave the European Union on June 23, emerging markets might not have much to fear unless the vote has a severe impact on Europe as a whole, according to Patrick Mange, the head of Asia-Pacific and emerging market strategy at BNP Paribas.

Voter polls ahead of the forthcoming referendum show that the race between those in the remain and leave camps is still very tight with voters polarized over key issues in the debate such as the economy, immigration and the benefits of EU membership.

Much attention has focused on the potential economic impact on the U.K. itself should a majority vote to leave the EU, but not so much on the impact on Europe and even less so on emerging markets. The latter may be geographically distant from the U.K. and the EU but nonetheless dependent on the bloc to a certain extent in terms of exports and domestic growth.

Mange said that a potential Brexit would have a limited effect on emerging markets – as long as Europe as a whole remained robust if the U.K. left the 28-member economic and political bloc.

'There will be an effect'

A general view of the Building of the European Parliament on May 12, 2016 in Strasbourg, France.  The United Kingdom  will hold a referendum on June 23, 2016 to decide whether or not to remain a member of the European Union (EU).
Getty Images
A general view of the Building of the European Parliament on May 12, 2016 in Strasbourg, France. The United Kingdom will hold a referendum on June 23, 2016 to decide whether or not to remain a member of the European Union (EU).

Presenting his outlook for emerging markets at the bank's London headquarters on Wednesday, Mange also said that the impact of a Brexit, specifically on emerging markets, depended on how Europe responded to such an event.

"We see a lot of different scenarios ... not specifically on emerging markets but on the universe as a whole, yes, there will be an effect. There is already an effect on assets in emerging markets just because there is a risk-off behavior which is in place again due to Brexit uncertainty and this impacts emerging markets because you move back your assets to markets that look a bit more defensive and secure than emerging markets are," he said.

"Of course there is a sentiment factor and if you have a Brexit, sentiment will get more sour (towards) risk-on assets almost everywhere in the world," he added.

"But other considerations that we've made here as a team and company are considerations about Europe in particular and the monetary union countries and periphery countries," he added later, "then, indirectly, the export markets in emerging markets would be impacted probably a little bit more if there is a stronger impact from the Brexit on European countries ... not in political terms but in trade terms," Mange said.

UK could suffer most

Referring to the recent poll swing in favor of the leave camp, Mange said that the polls suggested that the risk of a Brexit had "definitely increased" and that uncertainty was focused on the U.K. rather than Europe.

"There is a lot of uncertainty about Brexit on the U.K. itself," Mange said, adding that economists, strategists and management teams within the French bank were discussing the Brexit risk and how to position and protect the bank's asset portfolios.

The bank's central scenario was for the U.K. to stay within the bloc, however.

"We don't really see a strong impact on Europe in economic terms. It would not be positive but the impact would not be that big ... we do not see a strong drop in GDP (gross domestic product) in Europe but the impact on the U.K. we see as much stronger, we see quite a substantial drop in GDP in the U.K. so that's a little bit worrying."

"So if you don't have much of an impact on Europe ... which is one of the main destinations of emerging market exports ... then you wouldn't think that the impact on emerging market economically would be that big," he added.

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