As the prospect of a British exit from the European Union has come into sharper focus, investors Asia have grown more anxious about the potential impact of such an event. Initially, concerns have been more focused on potential short-term volatility, but market participants are growing increasingly aware of the longer-term and multi-faceted effect that Brexit could have on their business.

British voters will go to the polls this Thursday for the first public referendum on EU membership since 1975, to decide whether to leave the EU after some 40 years as a core member.

International asset and wealth managers see the outcome of this vote as the biggest current risk for the financial markets – even more so than China’s slowdown or the risk of a Donald Trump presidency in the US. Jan Dehn, head of research at UK fund house Ashmore, for instance, has argued that a UK departure from the EU could deter Asian investment from the UK, and potentially even Europe.

The ‘Brexit’ effect spread to Asia last week, with markets sharply down over concerns about the momentum gained by the ‘leave’ campaign in recent weeks. Japan's Nikkei 225 was down by 6.6% over the week and Hong Kong's Hang Seng by 4.3%.

Yesterday, the UK's Jupiter Asset Management announced its latest wealth manager sentiment survey results, showing that Brexit was a concern for 100 of the 150 individuals polled. “There are strong concerns that a vote to break away from the EU would result in foreign investors questioning their exposure to UK assets,” said Nick Ring, global head of distribution at Jupiter.

However, momentum appears to have shifted in the past few days behind the ‘remain’ camp. Asian stock markets yesterday recovered some of last week’s losses, and sterling gained almost 2% against the dollar yesterday (at the time of writing), as the latest polls suggested that the UK would vote to stay in the EU.

But the potential risk to markets and businesses is clear – even if Britain votes to remain.

Mark Shipman, Hong Kong-based global head of investment funds at law firm Clifford Chance, told AsianInvestor: “Our clients in Asia are watching the situation, but there is less of an immediate concern for them from a legal or a regulatory standpoint. That will take time to work itself out. The biggest issue is the markets; they will be looking anxiously to see how the markets react on Friday after the vote.”

Fund managers – such as those in China – looking at establishing a presence in Europe will need to consider whether a London base would allow them to take advantage of passporting in the region, if Brexit were to happen. 

And this could mean further prolonged uncertainty. Shipman said the industry would not know until much later what arrangements continental Europe would be prepared to enter into with the UK in respect of, for example, fund passporting.

In this regard, Brexit could mean opportunities for other financial hubs, he added. Asset managers in the UK would consider whether they may need to set up a presence in Europe, if they don’t already have something suitable. That might be in Paris, Frankfurt or Luxembourg, suggested Shipman. “I am sure each of these cities will be actively promoting themselves.”

In the meantime, asset managers have expressed a consistent view that the negative campaigns run by both sides have been superficial and often misleading, and not reflective of the importance of the decision. The climate of fear created by the referendum has not been good for markets or fund flows, with investors preferring to take risk off the table, given the uncertainty.

"Even a successful ‘remain’ vote, which is our expectation, will not fully quell the volatility around governance of the EU,” said one fund executive. “A ‘leave’ vote could seriously dent European economic momentum and pressure the pound and related risk assets, while strengthening the dollar."

If Brexit were to occur, London’s status as the premier financial centre in Europe would be diminished, as some City firms would almost certainly relocate workers. JP Morgan, for one, has said it may move 4,000 jobs to mainland Europe.

This would also have implications for office and residential real estate markets. One Hong Kong-based observer questioned whether there was enough office space in the main European centres to accommodate the thousands of other bank and asset management staff who could well follow JP Morgan.