* Worries about UK-EU ties come as UK economy weakens
* Pound seen extending slide
* 'Brexit' risk could harm investment into UK
By Jessica Mortimer
LONDON, Jan 23 Prime Minister David Cameron may
have sown enough uncertainty about Britain's membership of the
European Union to potentially sour investor sentiment towards UK
stocks, bonds and sterling.
In a much-anticipated speech, Cameron promised on Wednesday
to hold a referendum on whether the country should stay in the
EU if his government is re-elected in 2015.
While UK financial assets did not lose much ground during or
after the speech, there are concerns that a prolonged debate on
whether Britain should stay in the EU may have a damaging impact
on business and investment, as Deputy Prime Minister Nick Clegg
"Britain would have to be re-evalued as a location for
investment for German companies," Rainer Dulger, president of
the employers' association Gesamtmetall, told Reuters. "On
(Goods and services) produced for customers on the continent
Britain would loose appeal," he added.
An exit would be an additional worry for international
investors, who are already concerned about Britain's sluggish
economic activity and the risk that it will lose its prized
triple-A credit rating.
"Cameron needs to explain clearly what his policy is to the
international investors who put their faith and money in UK
corporates," said Simon Derrick, head of currency research at
Bank of New York Mellon.
"The real 'so what' is that on top of the issues with regard
to the economy and the UK's credit rating we could also get
Derrick said the euro therefore had the
potential to push towards 90 pence against sterling, more than
six percent above its current levels.
Markus Kerber, head of Germany's influential industry lobby
group BDI, said Britain put the EU as a whole at risk.
"Cameron's European policy course leads straight into a dead
end," Kerber said. "Permanently exiting the economic and
currency union and making national interest the measure of all
things, endangers the internal market," Kerber added.
Given analysts do not expect any referendum to be held for
several years, it means a long period of uncertainty for UK
Against this backdrop, an important driver of investor
sentiment towards UK assets will be how euro zone politicians
and business leaders react to Cameron's demands for a new
settlement with the EU.
So far, the signs are unpromising. (Click here for more
stories on reaction .)
"Overall, it's a very confused speech. A lot will probably
think 'What the hell is he thinking?'," said Marc Ostwald, fixed
income strategist at Monument Securities.
The damage the EU membership debate could inflict on UK
assets is all the greater given investors are growing less
worried about the euro zone crisis, from which sterling
and gilts had been a bolt-hole.
The premium that investors demand to hold UK government
bonds rather than German ones would therefore widen from around
44 basis points currently. At the height of the euro zone crisis
in late 2011, the yield on the UK 10-year bond fell
below its German counterpart.
Barclays economist Simon Hayes said even though the chances
of a UK exit from the EU were remote, uncertainty over the issue
would "make it harder to attract inward investment".
This is expected to influence investors' appetite for UK
stocks. Small- and medium-sized British firms, which tend to be
more reliant on sales to the EU than FTSE 100 companies,
would be the most exposed to the EU membership debate.
Any turn in this debate that suggested exporting goods or
services to the EU might become harder or more costly for firms
would hurt UK stocks more broadly.
However, Gerard Lane, an equity strategist at Shore Capital,
said large British companies which earn most of their income
from abroad, such as Unilever, BAE Systems and
Rolls-Royce, would be most sheltered from any downdraft
in UK stocks.