Brexit would result in toxic mix for UK, Credit Suisse says

A decision by the UK to leave the European Union could see a further sharp drop in the pound and lead to an "immediate and simultaneous economic and financial shock for the UK," amid a toxic mix of depressed confidence, tightening financial conditions and falling real incomes, Credit Suisse said in a research report sent to clients.

The medium-term outlook would not be much rosier, the Swiss broker argued, predicting that in the medium-term Brexit would be negative for both UK demand and supply, implying a weaker path of growth for the country´s gross domestic product.

Should the UK opt to remain inside the impact would be "muted", although the increased uncertainty in the run-up to voting is "likely to cause financial and economic volatility," the analysts said.

Credit Suisse´s foreign exchange strategy was based on a 60:40 probability that Britons would finally decide to stay in/opt out of the EU.

Under the former scenario, the broker estimated that the euro would strengthen to 0.83 versus sterling - its average level since 2009. Together with a move in the single currency towards parity that would clear the way for a drop in cable towards 1.20.

However, should Brexit be rejected then they expected euro/gbp to be around 0.70 in 12 months´ time and cable "well above" 1.40.

Aside from the impact on business confidence, a 'yes' vote could see capital flows towards the UK suddenly grind to a halt, making it harder to finance the current account deficit, thus weakening sterling.

Under the most extreme scenario, Britain´s gross domestic product would drop by between one and two percentage points, while financial conditions would tighten, inflation rise and real incomes drop.

In the equity space, they continued to recommend buying UK-listed euro earners while remaining cautious on domestic cyclicals and to be long the FTSE 100 versus the domestically-oriented FTSE 250.

"From a regional allocation perspective, we have not changed our benchmark recommendation on UK equities: with only 21% of earnings from the UK, weaker sterling would, we think, offset the higher discount rate (interest rates, that is) placed on UK-related earning streams," the broker said.