The 4 Brexit outcomes smart investors need to prepare for

In fact, there is a good Brexit and a bad Brexit — in which either the U.K. works out a fairly amicable resettlement of its relationship with its European neighbors, or, alternatively, Brexit triggers an ugly trade war that could easily ripple out beyond its immediate borders.

Likewise, there is a good Bremain and bad Bremain — in which either the issue is settled for a generation, or else the government collapses amid acrimony, and a Labour Party that has swung to the left seizes power. Which will it be? We should know by Friday lunchtime.

Anyone looking back from the end of the year may find it hard to recall why anyone got quite so worked up about Brexit in the first place. True, it matters to the U.K., although in reality far less than many people imagine. But it is hard to see why it has dominated the global markets for weeks.

What possible difference does it make to Microsoft MSFT, +2.24% or Samsung 005935, +0.69% whether Britain, a significant but hardly crucial market, is part of an European trade bloc or not? The answer, surely, is very little — the markets have just decided to panic about the result.

That said, given the attention lavished on it, the outcome will matter on Friday. In the final day of campaigning, the smart money has decided that Britain will vote to Remain, and, writing from London, that certainly feels right. The Leave campaign has failed to focus on a single issue, and it has failed to reassure people the economy will emerge unscathed.

Yet who knows? Turnout will make a huge difference, and the polls have too little experience to draw upon to make their predictions in any way reliable. It could still easily go either way.

The problem for the markets is that it won’t end there. In truth, leaving could be a disaster, and it could be a non-event. So, for that matter, could remaining. Here is a rough guide to four possible outcomes, and their consequences.

First, a clear Brexit victory. What happens then? In the best scenario, David Cameron eats a large helping of humble pie, remains as prime minister, is swiftly forgiven by his political rivals, and negotiates a quick and reasonable exit from the EU. Angela Merkel and Francois Hollande make a magnanimous settlement with the U.K., recognizing that their economies are in no shape to start a trade war with a major trading partner, and offer Britain open access to the single market. They might ask for a few things in returns — a modest contribution to the EU budget, for example, and compliance with its major rules — but nothing Cameron couldn’t agree to.

By the end of the year, the whole issue would be settled, and everything goes back to normal. That is a good Brexit.

Second, another clear victory for Leave, but this time followed by chaos. Cameron is forced to resign. The Conservative Party splits acrimoniously, and remains leaderless. After months of in-fighting a fresh election is called, and the Labour Party, led by its most left-wing leader ever, takes power. Across the English Channel, Merkel and Hollande put up trade barriers against British exports, and refuse to negotiate any kind of settlement.

The pound GBPUSD, +0.0205% collapses, and investors move out of the country. That is the bad Brexit.

Thirdly, a clear victory for Remain. A triumphant David Cameron is magnanimous in victory, but well aware that the vote has hugely strengthened his position. One or two prominent Brexit campaigners — most notably Boris Johnson — are sent into political exile, but the rest are quickly forgiven. The Leavers accept the result, and the issue is settled once and for all — or at least for a couple of decades.

Meanwhile, across the Channel, EU leaders acknowledge a major country came close to leaving, and resolve to reform the union, so that it centralizes less, and, most of all, improves its economy. hat would be a good Remain.

Finally, following a narrow victory for Remain, there is turmoil in the Conservative Party, and Cameron is forced to resign as PM before Christmas. One of the Brexit leaders replaces him, and promises to rerun the referendum as soon as possible. A war of attrition starts with Brussels, with constant demands for more powers to be devolved to the U.K.

With a tiny majority, a divided Conservative Party struggles to hold onto power. Meanwhile, in Brussels, unelected EU technocrats take the British vote as an excuse to centralize powers even further, introducing EU-wide company taxes, and seizing control of state budgets. That would be a bad Remain.

Which will it be? Given Cameron’s political skill, which remains underestimated by most pundits, a good Bremain is the most likely. But we will find out after the votes are tallied, and when we see the immediate reaction, not just in London, but also in Brussels and Berlin.

In reality, smart investors need to see not just the result. They need to see the margin of victory, and the immediate political fallout. Only then will they know if they can safely go back to fretting about commodity prices and American interest rates, and all the things that normally worry them — or whether Brexit will continue to dominate the markets for months to come.

About the Writer:

Matthew Lynn is the Founder of Endeavour Press. Financial columnist for WSJ MarketWatch, Daily Telegraph and Money Week, and the author of the Death Force thrillers

Source: MarketWatch