Brexit: Breaking up is never easy, or cheap

25 January 2016
Global Markets Research

Brexit: Breaking up is never
easy, or cheap

Connections Series

 The EU referendum is the key risk event facing the UK in 2016. Our base-
case scenario is that the referendum will be held in June 2016 and the UK will
vote to stay in the European Union.

 The increased uncertainty around the referendum is likely to cause financial
and economic volatility and negatively impact growth in the short term.
Consequently, the timing and path of rate hikes may also get affected.
However the impact is expected to be relatively muted if the UK votes to stay.

The Credit Suisse Connections Series  If the UK votes to leave the EU, it is likely to entail an immediate and
leverages our exceptional breadth of macro simultaneous economic and financial shock for the UK. We can expect a drop
and micro research to deliver incisive cross- in business investment, hiring and confidence. A sudden stop of capital
asset and cross-border thematic insights for flowing into the UK could make the large current account deficit difficult to
our clients. sustain and lead to a sharp fall in sterling. In its most extreme that could mean
a level drop in GDP of 1%-2% in the short term due to the toxic blend of
GLOBAL MARKETS RESEARCH depressed business confidence, tightening financial conditions, higher
See inside for the contributors of each section inflation and falling real incomes. In the medium term, we expect it to be
negative for UK demand and supply, implying a weaker GDP growth path.

 FX Strategy: Our FX forecasts should be seen as a probability-weighted
expected move using roughly a 60:40 probability of staying in/leaving the EU.
If the UK were to vote to leave, we would expect EURGBP to push on towards
0.83, its average level since 2009. This leaves room for GBPUSD to trade
towards 1.20 if EURUSD pushes lower towards parity as we expect.
Conversely, if Brexit is rejected, we would expect EURGBP to be around 0.70
in 12 months’ time, with GBPUSD well above 1.40.

 Rates Strategy: We believe it makes sense to be long gilts on cross-market
basis and we favour GBP 10s30s steepeners into the referendum. Should the
UK vote to leave, we expect a bull steepening of GBP 2s10s.

 ABS Strategy: We expect (i) structurally wider spreads, with the RMBS
market underperforming both government and covered bonds, (ii) foreign-
currency issuance to dry up. For investors concerned about the outcome, it
makes sense to either reduce risk early, or to hedge via other, more liquid
asset classes, that are likely to reprice sooner.

 Equity Strategy: We continue to recommend buying UK-listed euro earners;
remain cautious of UK domestic cyclicals (especially UK office REITs and
London-focused housebuilders); be long the FTSE 100 versus FTSE 250, and
we highlight a group of stocks we think could be negatively impacted. 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 placed on UK-
related earning streams.

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST
CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do
business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a
conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor
in making their investment decision.

25 January 2016

Exhibit 1: Impact of Brexit on economic and financial variables

Immediate Medium-term (2 years+)

GDP Significant level drop, possibly 1-2%, due to depressed business Weaker growth rate due to fall in both demand and potential supply.

confidence, tightening financial conditions, falling real incomes and

higher inflation.

Inflation Fall in currency raises inflation through higher import and oil prices and Unclear, as it depends on whether demand falls more or supply and the
this effect is likely to dominate weaker domestic inflation. monetary policy response, possibly lower in the medium term.

Monetary Policy Ambiguous given the MPC would face both lower growth and higher Unclear.
inflation. Past behaviour suggests they would ease.

House prices Slightly down mainly due to weaker nominal and real income. Fall in housing demand due to reduced immigration and UK status as a
financial hub.

Currency Strong initial weakening in sterling and higher implied volatility Sterling could remain on a longer term weakening trend against the US
throughout the curve. We would expect EURGBP to push on towards dollar if flows continue to leave the UK and the MPC’s monetary policy
0.83, its average level since 2009. This leaves room for GBPUSD to outlook divergences against the hiking Fed.
trade towards 1.20 if EURUSD pushes lower towards parity as we
expect.

Rates Aggressive rally in the front-end; 2s10s steepening Lower terminal rate

Equities Negative for UK domestic cyclicality, Scottish-exposed stocks and the An extended period of sterling weakness could start to reverse the multi-
FTSE 250 relative to the FTSE 100. year underperformance of the FTSE 100 relative to global equities.

RMBS Higher spreads based on increased risk premia. Likely pause in Higher spreads based on reduced quality of the collateral
issuance. Lower demand/ incentives for issuers.

Source: Credit Suisse

Brexit: Breaking up is never easy, or cheap 2

25 January 2016

Brexit: Breaking up is never easy, or cheap

Fixed Income Research Analysts The EU referendum is the key risk event facing the UK in 2016. The Conservative
government has promised to hold a referendum on whether the UK should remain in or
Sonali Punhani leave the European Union by the end of 2017. There is no official date of the referendum
44 20 7883 4297 yet and before it takes place, Prime Minister Cameron will attempt to renegotiate UK’s
[email protected] relationship with the European Union.

Neville Hill Our base-case scenario is that the referendum will be held in June 2016 and the UK
44 20 7888 1334 will vote to stay in the European Union.
[email protected]

The increased uncertainty around the referendum is likely to cause short-term volatility,
with firms holding off investment or hiring plans until the results of the referendum are
clear. While the consequences of the EU referendum and our central scenario i.e.,
the “Remain” outcome are likely to be relatively contained, though negative in the
short term, the consequences of the “Leave” outcome are expected to be drastic
and long-lasting. In this note, we focus mainly on that scenario in which the UK votes to
leave the European Union.

Before the referendum

Before the referendum takes place, Prime Minister Cameron will attempt to renegotiate
UK’s relationship with the European Union. In a letter to the European Council President
Donald Tusk, he listed out his four key demands:

1) Safeguards for those outside the Eurozone.

2) Boosting Europe’s economic competitiveness.

3) Restricting benefits for EU migrants. EU migrants must live and work in the UK for four
years before they qualify for in-work benefits or social housing.

4) Sovereignty and enhancing the role of national parliaments. Ending UK’s obligation to
work towards an “ever closer union” as set out in the Treaty.

Negotiations are ongoing, and the EU summit on 18-19 February now looks like the
earliest date when a deal might be reached. The December EU Summit provided “a
pathway to a deal” in February, however there was opposition from the EU leaders on the

plan to restrict benefits to foreigners which includes a request to revise the underlying

treaty. The complexity of the negotiations means that there is a risk that it may take longer

than expected.

The factors that influence the expected date of the referendum are:

1) Speed of the negotiations and the timing of the deal.

2) Political events in the UK and Europe in 2016 and 2017, as shown in Exhibit 2. These
include elections in Scotland, Wales and Northern Ireland in May 2016, French
presidential elections in May 2017 and German federal elections in October 2017. The
UK is holding the position of the Presidency of the Council of the EU during July-
December 2017. In our view the probability of the referendum taking place during
these intervals is low.

3) The Electoral System noted that a six month gap is advisable between the passing of
the EU Referendum Bill and the referendum. The EU Referendum Bill was given Royal
Assent on 17th December 2015, hence June 2016 is the earliest month when the
referendum can take place.

Brexit: Breaking up is never easy, or cheap 3

25 January 2016

Exhibit 2: Timeline influencing the referendum date

Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18

= EU May 16: 20-21 Oct May 17: French 22nd Oct 17: German
Summit Elections in 15-16 Dec Presidential elections Federal elections
Scotland, Wales
18-19 Feb
and N.Ireland

17-18 Mar 23-24 Jun

17th Dec 15 - 17th June 16: June or September 2016: 1st July - 31st Dec 17: UK
Six months since passage of likely referendum dates EU Presidency

referendum bill

Source: Credit Suisse

If a deal is reached at the EU Summit in February 2016, then a referendum is likely in
June 2016. Ministers have calculated that roughly four months are required between the
announcement of the referendum and the referendum. Our base-case scenario is for
the referendum to be held in June 2016, but any delays in the renegotiation could push
it out further.

The final outcome of the renegotiation and the deal that Prime Minister Cameron manages
to secure is important, in our view, for the result of the referendum. Opinion polls so far
show a lead for the remain campaign with 45% voting to remain in the EU versus 39%
voting to leave, if we take an average of the opinion polls in December 2015 (Exhibit 3).
The lead of the remain campaign has narrowed though across all polling companies, with
a few polls even showing the leave campaign in the lead (Exhibit 4). The share of don’t
knows is still quite significant, i.e., on an average 15% of the voters are undecided. Since
the lead of the remain campaign is narrow, the undecided voters will be key for the
outcome of the referendum.

More clarity on the outcome of the deal with the EU as well as the consequences of the
UK voting to leave the EU are likely to affect voting patterns, especially of the undecided
voters. In a Yougov poll in September 2015 adding the condition that the British
government renegotiated its relationship with Europe and said that Britain’s interests were
now protected, increased the support for the Remain campaign by 9%.

It is also important to be cautious while interpreting these opinion polls, given that in past
events such as the UK 2015 general election they were not completely reliable. They are
also likely to move once the deal with the EU is finalized as we discussed above.

Brexit: Breaking up is never easy, or cheap 4

25 January 2016

Exhibit 3: Opinion polls show the 'remain campaign' Exhibit 4: Though the lead of the 'remain campaign'
in the lead has narrowed

Monthly average of opinion polls Remain Leave Unsure
Yougov
60% 37% 19%
45% 42% 17%
50% July 41%
December ComRes/ Ipsos MORI 26% 11%
40% 63% 34% 9%
July 57%
30% December 36% 19%
ICM 40% 17%
Remain Leave Unsure July 46%
December 43% 37% 18%
20% 42% 18%
July Survation
10% December 45%
2012 2013 2014 2015 40%

Source: IPSOS MORI, ICM, Survation, YouGov, Credit Suisse Source: IPSOS MORI, ICM, Survation, YouGov, Credit Suisse
We took an average of all the polls that were conducted in a particular month by a polling
company and then averaged across different polling companies.

Our central view is for the UK to vote to remain in the EU

Our central view is for the UK to vote to remain in the EU. Both the Scottish Referendum
and the UK general election revealed the preference of the UK electorate to be
conservative and vote for the status quo.

Our central scenario is likely to entail short-term volatility. The UK general election saw a
fall in investment and hiring intentions as well as financial market volatility prior to the
event. April 2015's quarterly CBI survey and the PMI surveys showed a large plunge in
business confidence due to the pre-election uncertainty as shown in Exhibit 5. During the
Scottish referendum, financial markets reacted a few weeks before when the polls
narrowed in the form of weaker sterling and higher sterling volatility (Exhibit 6).

In a similar fashion, we can expect growth to be hit in the short term during the EU
referendum through a hit to investment intentions and business confidence. According to
Ernst & Young’s attractiveness survey 2015 for the UK, 31% of the firms surveyed are
likely to reduce or postpone FDI between now and end of 2017 due to the possibility of the
UK leaving the EU. Regardless of the outcome, just the uncertainty is expected to have a
negative effect. However, the overall negative impact of the referendum is likely to be
temporary and muted if the UK votes to remain in the European Union.

Brexit: Breaking up is never easy, or cheap 5

25 January 2016

Exhibit 5: UK general election triggered short-lived Exhibit 6: The Scottish referendum triggered 1.75
uncertainty and plunge in business confidence financial market volatility 1.70
1.65
CBI survey: Investment intentions 12 GBPUSD 3m implied volatility (lhs) 1.60
11 GBPUSD (rhs) 1.55
20 10 1.50
9
10 8
7
0 6

-10 Scot
5 Ref.
Fall in 4
-20 investment
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
-30 intentions
pre

-40 elections
(Apr 2015)

-50
1990 1994 1998 2002 2006 2010 2014

Source: Credit Suisse, CBI

The bigger impact is likely to be on the timing and path of rate hikes. Our call for the
first Bank of England rate hike is August 2016, but a referendum around that time is a risk
to our call, given the short term negative growth impact and uncertainty around the event,
as highlighted above. If the referendum gets postponed to 2017, then we may see a
quarter or two where the Bank of England might put the hike on hold, assuming they have
begun the tightening cycle in H2 2016.

Brexit: significant and long-lasting impact

Our risk scenario, i.e. the UK voting to leave the EU, is likely to have a more significant
and long-lasting effect. The exact magnitude of the impact is difficult to estimate as it will
depend on the status of the UK outside the European Union.

If the UK votes to leave the European Union, it will have two years to negotiate the terms
of withdrawal and all its existing treaties with the European Union under Article 50 of the
Lisbon Treaty. Additionally it is likely to take longer to renegotiate the original agreements
with non-EU states. The exact form of the exit relationship could be similar to the existing
models i.e.,

 European Economic Area/ Norway-style

 Bilateral agreement/ Switzerland-style

 Customs union/ Turkey-style

 Free Trade Agreement/ South Africa style

 WTO/ Most favoured nation treatment

The main features of each model are shown in Exhibit 7. In our view it is more likely to
be a unique relationship tailored specifically for the UK, resembling a free trade
agreement for goods with restrictions for services. The UK is unlikely to opt for an
EEA model or a customs union as those would require following EU rules that the UK
would effectively reject in the first place if it votes to leave the EU.

Brexit: Breaking up is never easy, or cheap 6

25 January 2016

Exhibit 7: What would the UK look like post leaving the EU? More likely to be a unique relationship

Full access to Independent Influence over Regulatory Independent Contribution
the single market external trade EU regulations sovereignty
Tariffs immigration to EU Likelihood
policy
policy budget

No (but not part of Engagement in No, regulation must be Yes, but Unlikely, as no regulatory

EEA (e.g. No Yes Common Agricultural construction of consistent with EU norms No - free movement smaller sovereignty, independent trade
Norway)
Policy or Fisheries regulation, but no or membership suspended of labour policy or discretion over

Policy) voting rights immigration

No - FTA on goods Uncertain Possible, as provides
but not services
Bilateral (access limited to Yes, theoretically, but (Switzerland doesn’t independent trade, and
Agreements
No regulations must be Yes, but possibly immigration, policy,
(e.g. services with Yes No have freedom to
Switzerland) consistent with EU norms smaller but uncertain whether EU
sectoral agreements restrict immigration
with the EU) to access single market would agree due to lengthy
from EU)
country by country negotiations

Unlikely, as the only benefit of

Customs No, regulations must be independent immigration policy is
Union (e.g.
No No No No consistent with EU norms Yes No offset by restricted market
Turkey)
or membership suspended access, no regulatory sovereignty

Free Trade No - FTA on goods Yes Yes, theoretically, but Yes and common trade policy
Agreement No but not services regulations must be Likely, if the UK manages to
(e.g. South No
consistent with EU norms negotiate a very deep
Africa) to access single market No

agreement and retain most
market access

WTO/ Most EU's Common No Yes No Yes Unlikely, UK and EU's trading
Favoured External Tariff relationship too complex to be
and substantial Yes No governed by simple MFN rules
Nation non-tariff barriers and emergence of tariffs not in

the interest of either party.

Source: Credit Suisse Fixed Income Research

Immediate impact

If the UK votes to leave the EU, even before the actual relationship of the UK with the EU
post exit becomes clear, the uncertainty and the potential negative consequences are
likely to risk a sudden stop of capital flowing into the UK. Given that these capital flows
finance the large current account deficit in the UK (roughly 4.0% of GDP), this will make
the current account deficit difficult to sustain. A vote to leave the EU could be the catalytic
event that turns the UK’s current account deficit from “something to worry about” to “a
problem”.

Given the clear economic risks above, markets would demand a considerably higher risk
premium to invest in UK assets. We think that would mean a sharp fall in sterling and the
price of UK assets, including equities, real estate and gilts. The fall in currency would raise
inflation and consequently squeeze real household incomes, depressing consumer
spending as was the case in the years after the depreciation of sterling in 2007-08. Also
business investment, hiring and confidence are likely to be further stalled due to the
uncertainty. In its most extreme that could mean a contraction in GDP of 1%-2% in the
short term due to the toxic blend of depressed business confidence, tightening financial
conditions, higher inflation and falling real incomes. Monetary policy response is
ambiguous given the MPC would face both lower growth and higher medium-term inflation.

Overall a vote to leave the EU would entail an immediate and simultaneous economic and
financial shock for the UK.

Brexit: Breaking up is never easy, or cheap 7

25 January 2016

Exhibit 8: The large current account deficit could Exhibit 9: As it is mainly financed by FDI and
become a problem on the UK leaving the EU portfolio investments

Current account deficit (% of GDP)- 4qma Net incoming FDI and portfolio investment as % of GDP, 4qma

3 25%
Portfolio investment
2
20% FDI
1 15% Total

0 10%

-1 5%

-2 0%

-3 -5%

-4 -10%

-5 -15%

-6 -20%
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

Source: Credit Suisse, ONS Source: Credit Suisse, ONS

Medium-term impact

The immediate level drop in GDP described above can be seen as a front-loading of the
fall in UK national income that the vote to leave the EU would imply for the UK. In the
medium term, it is likely to be negative for both UK demand and supply.

 Demand: We think it is unlikely that the UK would find a generous agreement with the
EU, especially in financial services. As a result trade, financial services and
consequently overall demand for UK goods and services would be negatively affected.

 Supply: It would also reduce potential supply due to a fall in the immigrant labour supply
from the EU, which has largely complemented the domestic working population and also
a fall in productivity. This will reduce potential growth in the UK.

Overall this would imply weaker GDP growth, making the recovery from the snap
recession more muted and the GDP level post leaving meaningfully lower than if the UK
votes to stay. Moreover, the EU has little incentive to see the UK prosper outside of the
EU, as it could have negative political consequences for the rest of the EU.

Impact on goods trade: The EU is an important trading partner of the UK accounting for
44% of UK’s exports and 53% of UK’s imports in 2014. The UK runs a current account
deficit in goods with the EU (Exhibit 10). Thus it is in the interest of the EU to maintain a
free trade agreement with the UK, which in our view is the most likely scenario.

However, in the situation where a free trade agreement is not negotiated, we look at some
key sectors where tariffs may be erected in Exhibit 11. The EU’s average tariff has fallen
substantially in recent decades but there are some sectors where the tariffs are high.
These include both areas in which the UK has a trade surplus with the EU such as
liquefied natural gas, wheat etc. as well as areas in which it has a deficit such as cars,
chemicals, clothing and food. UK consumers could face higher prices on these, although
it’ll depend on the tariff structure adopted by the UK.

Brexit: Breaking up is never easy, or cheap 8

25 January 2016

In order to access the EU markets, the UK would have to comply with EU regulations and
product specifications. The ability of the UK post exit to negotiate more favourable trade
treaties with non EU countries is also in question, given that on its own the UK would have
less bargaining power.

Exhibit 10: UK trade balance with the EU Exhibit 11: Sectors with high EU MFN tariffs

% of GDP Non- crude oil Surplus with EU 4.1% tariff
Unwrought aluminium Deficit with EU 6% tariff
2 Wheat and meslin 12.8% tariff

1 Motor vehicle parts 3.8% tariff
Motor cars 9.8% tariff
0 Goods vehicles 12.1% tariff
Wine 32% tariff
-1
Source: Credit Suisse, ONS, European Commission
-2

-3
-4 Services
-5 Goods
-6 Balance

2000 2002 2004 2006 2008 2010 2012 2014

Source: Credit Suisse, ONS

Impact on services, mainly financial services: However, it is in the services sector that
a free trade agreement would be more difficult to negotiate given that the UK runs a
surplus in services with the EU, mainly financial services. 40% of UK’s financial services
are currently exported to the EU. If the UK votes to leave, the EU wouldn’t have much
incentive to maintain the position of London as a financial centre and some EU countries
may seek to attract the financial services business away from the UK.

There are two main scenarios that could play out for UK financial services, as follows:

 The UK could de facto lose access to the single market in financial services. The loss
of the EU Single Market Passport for financial services licencing or not being
determined “third country equivalent” is likely to reduce the status of London as a global
financial centre. This will limit the ability of financial institutions to provide financial
services advice and products to EU clients or transact in securities in London and cross
border with EU clients, eroding their competitiveness. Non-UK banks which set up shop
in London as a gateway to access European markets may then opt to locate branches
in Paris or Frankfurt.

 Even if the single market access is maintained, the UK would lose the ability to
influence financial regulation at the EU level. In order to maintain single market access,
the UK would have to follow financial regulation that it has no role in drafting. Hence
there is a risk that regulations are drafted that would be detrimental to the UK’s
financial services sector. For example, in the past the UK has managed to block the
proposal from the ECB to limit the clearing of euro denominated OTC trades outside
the Eurozone.

Impact on Foreign Direct Investment: If the UK loses single market access, then
corporate relocation is likely in the financial services sector but also more broadly in other
sectors. Moreover further FDI inflows into the UK are also likely to fall. Currently half of the
FDI stock in the UK comes from the EU while FDI flows from the EU are decreasing in
importance. A large share of the FDI stock in the UK in 2014 was in the financial services
sector.

Brexit: Breaking up is never easy, or cheap 9

25 January 2016

Exhibit 12: Half of the FDI stock in the UK is from Exhibit 13: FDI stock by type
the EU
2014
FDI stock by origin (£bn)
Agriculture, forest & fishing
1000 EU The Americas Mining & quarrying 0.2%
Asia Rest of world Manufacturing 9.5%
Electricity, gas, water and waste 20.2%
800 2008 2010 2012 Construction 4.8%
Retails & wholesale trade, repair of motor vehicles & motor cycles 1.3%
600 Transportation & storage 13.1%
Information and communication 4.0%
400 Financial services 8.3%
Professional, scientific & technical services 27.1%
200 Administrative and support service activities 5.1%
Other services 3.2%
0 2006 2014 2.7%
2004

Source: Credit Suisse, ONS Source: Credit Suisse

One of the key reasons why the UK attracts FDI is because it provides a gateway to the
single market as well as provides firms a large talented pool of workers to hire from the EU.
According to Ernst & Young’s attractiveness survey 2015, 72% of the investors cite access
to the single market as important to the UK’s attractiveness. If the UK did vote to leave the
EU but retained access to the single market on similar terms as today but with no political
links to the EU, then 31% would still think the UK as less attractive as an FDI location.

An IPSOS MORI survey in 2013 interviewed 101 UK based CEOs, chairmen, CIOs, board
members, directors and partners of companies on the importance of single market access.
Exhibit 14 shows that 38% of the firms said they are likely to relocate at least some of their
headcount from the UK if the UK left the single market. Amongst the most significant
benefits of UK’s membership of the EU, ease of access to customers in the EU was
considered to be the top benefit (Exhibit 15).

In our view, industries with a large share of exports which are dependent on access to the
single market in the EU such as financial services and manufacturing are vulnerable to
relocation. Corporate relocation as well as a fall in future FDI inflows into the UK are likely
to further threaten the fragile state of the current account deficit.

Brexit: Breaking up is never easy, or cheap 10

25 January 2016

Exhibit 14: Importance of single market access Exhibit 15: Benefits from EU membership

IPSOS MORI poll- In a scenario where the UK left the Single Market, how likely IPSOS MORI poll- Which of the following are the most significant benefits to
is it that your firm would relocate at least some of its headcount from the UK to a your business of the UK's membership of the EU?
location within the Single Market?
Ease of access to customers in the EU 49%
38% A single regulatory framework in the EU for financial services 46%
Certain to Ease of cross-border trading within the EU 44%
Ease of visa free recruitment from across the EU 29%
Very likely Increasing harmonization of standards across the EU 28%
Being part of EU FTAs 26%
1% 10% 27% 20% 29% 13% Fairely No significant benefits from the membership 9%
likely
Not very

likely
Not likely

at all
Don’t know

0% 20% 40% 60% 80% 100%

Source: IPSOS MORI, Credit Suisse Source: IPSOS MORI, Credit Suisse

Impact on the labour market: The EU’s labour force has historically acted as a buffer for
the UK labour market, making it more flexible. The fluctuations in UK labour demand and
business cycle are usually accompanied by fluctuations in the migrant labour force, while
employment levels of UK born workers have been more stable (Exhibit 16). Access to EU
workers has historically lowered the sensitivity of British workers to business cycles, which
may increase if the UK votes to leave the EU.

Moreover immigrants from the EU have tended to be complements rather than
supplements to UK born workers. If we compare the skill levels, EU workers either fall in
the low skill or high skill category, while UK born workers fall in the medium skill category
(Exhibit 17). Workers from the EU and the UK have a comparative advantage in different
skilled jobs and specialize in the sector where they are the most productive, increasing
overall productivity. The UK’s vote to leave the EU is likely to lead to a fall in productivity.

The surveys above show that one of the reasons why firms invest in the UK is to be able
to hire the pool of talented EU migrants. Reduced ability to do so is likely to lead to a
further fall in the willingness to invest in the UK and greater corporate relocation.

Brexit: Breaking up is never easy, or cheap 11

25 January 2016

Exhibit 16: Employment levels of foreign-born Exhibit 17: EU workers are complements to UK
workers are more volatile compared to the UK workers

One-year rolling standard deviation of quarterly employment growth rates Percentage of workers in each job-skill level by country of birth in Q1, 2011

2.5% Non UK 40% Low Lower middle Upper middle High
2.0% UK 35%

1.5% 30%

1.0% 25%

0.5% 20%

0.0% 15%
1998 2000 2002 2004 2006 2008 2010 2012 2014
10%
Source: ONS, Credit Suisse
5%

0% UK-born EU 14
EU A8

Source: ONS, Credit Suisse

EU 14 refers to Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, Netherlands, Portugal, Spain and Sweden while EU A8 refers to Czech
Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic and Slovenia)

The EU migrants are usually younger and net contributors to the UK budget on an average.
A fall in labour supply from the EU is likely to reduce population and labour force growth,
productivity and hence potential supply in the UK. This will create a shortage of young,
skilled labour in the UK leading to an increase in retirement age, taxes or the fiscal deficit.

Overall, the vote to leave the EU would entail an immediate and simultaneous economic
and financial shock for the UK. We are likely to see an immediate contraction in GDP,
which can be seen as a front-loading of the fall in UK national income that leaving the EU
would imply for the UK. In the medium term, we expect it to be negative for both UK
demand and supply implying a weaker GDP growth path. The recovery from the snap
recession is likely to be more muted, making the GDP level post leaving meaningfully
lower than if the UK votes to stay.

Finally, the UK voting to leave the EU is also expected to have longer term political
consequences in the form of heightened political tension and stress, both within the UK
and the EU.

Brexit: Breaking up is never easy, or cheap 12

25 January 2016

FX Strategy

Fixed Income Research Analysts  Our forecasts in Exhibit 18 should be seen as a probability-weighted expected
move using roughly a 60:40 probability of staying in/leaving the EU after the
Shahab Jalinoos Brexit poll. If the UK were to vote to leave, we would expect EURGBP to push on
212 325 5412 towards 0.83, its average level since 2009. This leaves room for GBPUSD to trade
towards 1.20 if EURUSD pushes lower towards parity as we expect. Conversely, if
[email protected] Brexit is rejected, we would expect EURGBP to be around 0.70 in 12 months' time,
with GBPUSD well above 1.40.
Bhaveer Shah
44 20 7883 1449
[email protected]

Over the past month GBP has fallen around 5% against the USD, making it among the
worst performers in G10 space. This is a remarkable feat given that shaky global markets
and falling oil prices usually provide sufficient reasons for higher-volatility commodity
currencies to underperform GBP at such times. Fears over a Brexit referendum have been
cited as a key reason.

In some ways the timing is odd as little new of note has happened on the Brexit front in the
past month to warrant this. While polls are pointing to a tighter result than markets would
care for, this was also the case at the start of December. We suspect though that the
December 17-18 EU Summit was important in terms of making the issue a headline item
simply by advertising to the world the imminence of a major potential political and growth
shock for UK markets.

Exhibit 18: Our new GBP forecasts compared to current Bloomberg consensus

EURGBP 3M Forecast 3M Cons. 3M Old New vs Cons New vs Old
GBPUSD +8.5% +11.6%
0.77 0.71 0.69 -5.4% -6.0%
EURGBP 1.40 1.48 1.49
GBPUSD New vs Cons New vs Old
12M Forecast 12M Cons. 12M Old +7.1% +7.1%
-11.3% -8.3%
0.75 0.70 0.70
1.33 1.50 1.45

Source: Credit Suisse Fixed Income Research, the BLOOMBERG PROFESSIONAL™ service. We use Bloomberg consensus as ‘consensus’
on 15 Jan 2016

Does this mean the Brexit bad news is already in the price? After all, in normal times, GBP
tends to be a relatively 'dull' currency with low realised volatility and mean-reversionary
tendencies. On the other hand, it can also be argued that risk-off environments are not
good for countries with large financial centres and second-tier, easily disposable reserve
currencies like the UK. This would imply that GBP weakness in the past month might not
be only a function of Brexit fears, leaving much more scope to price that in.

Our forecasts in Exhibit 18 should be seen as a probability-weighted expected move using
roughly a 60:40 probability of staying in/leaving the EU after the Brexit poll. If the UK were
to vote to leave, we would expect EURGBP to push on towards 0.83, its average level
since 2009. This leaves room for GBPUSD to trade towards 1.20 if EURUSD stays heavy
too and pushes lower towards parity.

We see six reasons to stay cautious on GBP due to Brexit risk, as follows:

1) Once in a generation event: the last time the UK had a Europe referendum was in
1975 (one author of this section was 4 years old and the other would not be born for
another 17 years). Major events that happen only every 40 years should be seen as
capable of causing extraordinary FX moves to extreme levels. The Scottish
Referendum gave markets a taste of this, but in economic rather than political terms
Brexit could be an even bigger shock.

Brexit: Breaking up is never easy, or cheap 13

25 January 2016

2) GBP isn't cheap: although GBP has fallen sharply in the past month, it is difficult to
characterise the currency as especially cheap. The UK has a persistent current
account deficit close to 5% of GDP and a large trade deficit with the euro area, its key
trading partner. GBP levels that could make a dent in this are arguably well below
current ones, not least because the trade-weighted GBP has been buoyed by
EURGBP weakness.

Exhibit 19: GBP TWI is ‘fair’, not undervalued Exhibit 20: GBP not ‘too weak’ in REER terms. The
IMF’s GBP REER suggests GBP overvalued to USD
GBP TWI
REER level to long term average is used to calculate overvaluation

110 GBP BoE TWI Broad GBP BoE TWI Narrow +30% BIS Broad REER IMF REER (CPI Method)

Broad Avg Narrow Avg

105 +20%

100 +10%

95

+0%

90

-10%

85

-20%

80

75 -30%

70 -40%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 USD AUD NZD GBP EUR JPY CAD CHF NOK SEK

Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service

It's worth noting that EURNOK and EURSEK are trading at lofty levels despite the low
EURUSD and EURGBP levels. Under extreme conditions (crushed oil prices for NOK
and QE for SEK) EUR satellite currencies, even backed by current account surpluses
as SEK and NOK are, have underperformed the EUR, and also trade persistently at
levels widely considered "cheap". This has also allowed USDSEK and USDNOK to
trade towards 10-15 year highs without anyone really noticing, given EURUSD
weakness. A major UK growth shock linked to Brexit has to classify as an event risk
with a potentially strong impact too. The implication is that if EURGBP rallies back by
a further 10% towards its post-2009 average around 0.83, GBPUSD has room to fall
towards 1.30, a level not seen since the 1980s!

Exhibit 21: Even as EURUSD fell in 2015, EUR Exhibit 22: This led dollar crosses like USDSEK and
crosses like EURSEK and EURNOK managed to rise USDNOK to reach multi-year/decade highs

EURSEK EURNOK EURUSD (rhs)1.60 11.00

10.00 USDSEK USDNOK

1.50 10.00
9.50
9.00
1.40

9.00 1.30 8.00
1.20
7.00
8.50 1.10

1.00 6.00
8.00

0.90

7.50 0.80 5.00
10 11 12 13 14 15 90 92 94 96 98 00 02 04 06 08 10 12 14 16
16
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service

Brexit: Breaking up is never easy, or cheap 14

25 January 2016

3) Policymaker green light: a move to GBPUSD 1.30 would likely cause significant
sticker shock and agitation in the UK media, more so than the more important
EURGBP rally to 0.83 that could bring it about. But we suspect neither the UK
government nor the Bank of England would be concerned by what would amount to a
further 10% fall in the trade-weighted GBP. After all, a key criticism of the Cameron
government has been its inability to rebalance the UK economy away from
consumption and towards exports and investment. A weaker GBP would hardly be a
bad outcome in that context. And with the BoE facing low UK inflation to start with and
a potential post-Brexit macro shock, tolerance of a weak GBP would be likely, as it
was in the years after the 2008 crisis.

It's important to emphasise that the kind of GBP move discussed so far, a further 10%
drop on a TWI basis, would barely even register as a "crisis" in our view. For that, we
would need to see some evidence of genuine capital flight by UK residents
themselves, as seen for example in the euro area periphery in 2012 and in emerging
markets on numerous occasions. Only then would the situation be severe enough to
prompt the kind of dramatic currency shifts to warrant steps like Bank of England rate
hikes to stem the tide, as seen in 1992. In our view we would need to see moves of
20% + before UK policymakers would need or want to put up a fight.

Exhibit 23: Our EURGBP forecast is still below the Exhibit 24: GBP TWI much less sensitive to USD
post-2009 average
50
GBPUSD 1.00
EURGBP (rhs) 45 Weightings of Bank of England GBP TWI
EURGBP average since 2009 (rhs)
40
2.20 Post 2009 range 0.95 35
in EURGBP 0.90 30
25
2.00 0.85 20
15
0.80 10
1.80
5
0.75 0

1.60 0.70 Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
0.65

1.40 0.60 Euro zone
0.55 USA

1.20 0.50 Germany
China
Jan-00 Sep-02 Jun-05 Mar-08 Dec-10 Sep-13 Jun-16
France
Netherlands

Belg Lux
Ireland
Italy
Spain

Switzerland
Japan
India
Poland

Sweden
Australia

Turkey
Canada

Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service

Brexit: Breaking up is never easy, or cheap 15

25 January 2016

Exhibit 25: Our 12M EURGBP forecast is a 1.s.d fall Exhibit 26: Our GBPUSD forecast does not stand
out for a ‘once in a generation’ event
30 EURGBP moves in a 12M period since 1990
30 GBPUSD moves in a 12M period since 1990
number of observed 12M periods
number of observed 12M periods
25 % move to our new 25
12M forecast
20 % move to our new
20 starting from Nov 15 12M forecast

15 -1sd +1sd 15 starting from Nov 15 +1sd

10 +2sd 10 -1sd

5 -2sd 5 -2sd +2sd

0 0
-23% -18% -12% -7% -1% 4% 10% 15% 21% 26% -28% -23% -17% -12% -6% -1% 5% to1t0a%l 12M16p%rice2r1e%turn %
total 12M price return %
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service

4) National balance sheet and income statement: the UK's balance sheet is very
leveraged, with assets and liabilities close to 600% of GDP. The liabilities tend to be
heavy on borrowing and portfolio flows, while the assets tend to be long term. This
"hedge fund" style balance sheet is inherently vulnerable at times of great stress. And
in recent years portfolio flows have been unusually high, perhaps linked to European
QE and a result search for yield.

Exhibit 27: UK portfolio liabilities have surged Exhibit 28: Liabilities are 600% of GDP
within the last three years
NIIP % GDP breakdown
4Q average of GDP; financing of financial account in liability minus asset terms

4Q avg Portfolio liabilities Portfolio assets 700%
%GDP Portfolio net (L-A) 600%
500%
20% 400%
300%
15% 200% Assets Liabilities
100%
10%
0%
5%

0%

-5%

-10% Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service, Datastream
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

positive value means money flowing into the UK / negative money leaving UK

Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service

5) Global reserve currency: emerging market central bank reserves are already under
pressure, with China and Saudi Arabia in particular in the news as they try to support
pegged or managed currencies. GBP has been a beneficiary of reserve manager
buying in the past, despite low yields and the fact that no country outside the UK has
significant GBP liabilities. This leaves the currency vulnerable to being "dumped" at
the best of times, let alone when the market has a perfect excuse like Brexit.

Brexit: Breaking up is never easy, or cheap 16

25 January 2016

6) Volatility pricing: longer-dated GBP implied volatility has tried to price in event risk
around the likely Brexit referendum date from June 2016 onwards. This has generated
steep GBP implied volatility curves. But we suspect relatively low near-term implied
vol levels are underpricing the risk of a spat at the February 18-19 EU summit when
the UK is set to discuss referendum terms. We can see many scenarios where
matters turn more nasty than markets are pricing, even if only to create a show for
respective EU and UK publics of competitive negotiations. This would risk sharper
near-term GBP declines and flatter vol curves driven by sharply higher short-dated
levels. Even longer-term vols have still more room to run if the market decides that a
Brexit outcome is not the end of UK political risk. For example, what if Scotland largely
votes to stay in and seizes on the overall exit decision as a reason to hold another
referendum? Or what if Brexit creates a recession painful enough to allow the
opposition Labour Party under supposed 'radical' Jeremy Corbyn to benefit from a
surge in opinion polls?

What are the FX market implications beyond the UK? If the UK were to vote for Brexit,
we suspect the EUR itself would see potential pressures. The departure of one of the
EU's largest and most market-friendly economies would be disturbing at the best of
times. But with nationalist and euro skeptic movements in abundance across the euro
area, we could imagine the market would need to price in a greater chance of broader
EUR breakup over time. If this becomes apparent quickly, we suspect the EUR would
come under pressure against currencies like USD, JPY and CHF that represent stable
countries with liquid currencies. At the very least, the risk of this would need to be
reflected in longer term EUR implied volatility (higher) and risk reversals (stronger bid
for EUR puts).

Exhibit 29: Front end vol could price more premium Exhibit 30: Risk premium priced over G10 vols

3M implied – 1m implied (USD cross) GBPUSD vol as a multiple of average vols in G10

0.4 1.7x GBPUSD implied volatility as a ratio to G10 average
3M-1M Implied Vol 1.6x
1.5x 5y min-max range
0.2 1.4x Average 5y range
1.3x Current
0 1.2x Pre General Elections peak
1.1x 6M before General Election
-0.2 1.0x Peak during Scotland Referendum concerns
0.9x 6M before Scotland Referendum
-0.4 0.8x
0.7x 2W 1M 2M 3M 6M 9M 1Y 2Y 3Y
-0.6 0.6x
0.5x
-0.8
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
-1
EUR CHF JPY GBP CAD AUD NZD SEK NOK

Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service

Brexit: Breaking up is never easy, or cheap 17

25 January 2016

Rates

Fixed Income Research Analysts Rates market implications of a Brexit

Florian Weber  The time around the presentation of the negotiation outcome in February could
44 20 7888 3779

[email protected] already provide an entry point to positions for the EU referendum.

Helen Haworth  We believe it makes sense to be long gilts on cross-market basis and we favour
44 20 7888 0757
[email protected] GBP 10s30s steepeners into the referendum. Our analysis suggests to close GBP

10s30s steepeners one week prior to the vote.

 Should the UK vote to leave the EU, we expect a substantial rally of the GBP front-
end and a bull steepening of GBP 2s10s. We also believe the UK breakeven curve
will flatten since weaker sterling and lower growth is getting priced into the
inflation curve.

Scottish referendum should be a guidance for the market reactions
ahead of the EU vote and if "yes" wins

The British referendum on EU membership will also have a significant impact on the rates
market. In particular, it should give an indication of the pricing for rate hikes, curves and
the outlook for inflation breakevens. In the EU referendum, the "yes" is for staying in the
EU while the "no" is for leaving the EU.

The last comparable event to the EU referendum was the Scottish referendum on
independence, held on 18 September 2014. Market pricing around this event may,
therefore, provide an indication for rates on a cross-market basis, ASW pricing and curve
behaviour. It should also give an indication about the potential flows from foreign investors
ahead of the EU referendum.

The reaction after the Scottish referendum is only providing guidance for the market

reaction if there is a "yes"-vote in the EU-referendum, i.e., the UK decides to remain in the
EU, since independence was rejected by the Scottish voters.1 We provide a discussion of

our expected market reaction in case of a "no" later in the document.

The key implications from the Scottish referendum that can be drawn for the likely market
pricing ahead of EU referendum and in case of a "yes"-vote in the EU referendum are, as
follows:

 Gilts should outperform on cross-market basis. Gilts, in particular, outperformed US
Treasuries ahead of the vote.

 GBP 10s30s should steepen.

 UK ASW should widen.

We believe USD-GBP spread wideners make sense if the risk environment stabilizes and
we move more into a risk on environment. The best trade for an ongoing risk off is GBP
10s30s steepener, in our view.

February could provide the first indication of the likely vote outcome
and provide an entry point

The first time that it may make sense for investors to look at entering positions regarding
the vote to leave the EU may be in February when Prime Minister Cameron provides the
details of the deal he manages to strike with the EU.

1 Please, note the question in the Scottish referendum was "Should Scotland be an independent country?". Therefore, the "no" in
the Scottish referendum is comparable to the "yes" in the EU referendum.

Brexit: Breaking up is never easy, or cheap 18

25 January 2016

The extent of the deal and the political response in the UK (and euro area) should provide
the first indication of the likelihood that the "no"-campaign will win. Similarly to the Scottish
referendum, we only expect the market to price the risk of the UK leaving the EU if the
polls suggest that the "no"-vote is likely.

It is interesting to see that the FX market is already pricing the risk of the "no" vote while
the rates market hasn't built a significant risk premium. Ahead of the Scottish referendum,
we could observe a similar pattern. The FX market was moving before the rates market
since it had to build in a risk premium to hold UK assets.

Gilts outperformed cross-market and on ASW ahead of the Scottish
referendum

Despite the selling by overseas investors, gilts outperformed the US and were neutral
against EUR ahead of the referendum. After the referendum, gilts traded in line with US
rates but outperformed EUR rates significantly (see Exhibit 31). We, therefore, favour
being long gilts on a cross-market basis ahead of the referendum makes sense.

Exhibit 31: 10y GBP outperformed USD and was Exhibit 32: Gilt ASW tended to widen into the
neutral against 10y EUR into the referendum Scottish referendum

Difference between other day values and the value at 0, in bp Difference between other day values and the value at 0, in bp
10
2.5
0
0.0
-10 -2.5
Change in bp
Change in bp

-20 -5.0

-7.5

-20 -10 0 10 -20 -10 0 10
Days around Scottish referendum
Days around Scottish referendum

10y GBP-UKT 10s GBP-EUR 2y UKT ASW 5y UKT ASW 10y UKT ASW

Source: Credit Suisse Locus Source: Credit Suisse Locus

In contrast to market expectations, gilt ASW did not tighten ahead of the Scottish
referendum. In fact, the ASW for 2s, 5s and 10s tended to widen ahead of the vote. (see
Exhibit 32). However, we would only consider entering ASW wideners if a "no" is
becoming likely. We believe the weakness in emerging market could lead to further selling
flows and the regulatory changes favour ASW tightening.

10s30s steepeners are attractive ahead of the referendum

The GBP 10s30s curve steepened ahead of the Scottish referendum. However, it reached
its steepest point one-week ahead of the referendum and then flattened aggressively into
the vote, re-steepening again afterwards (Exhibit 33).

We believe GBP 10s30s steepeners are an attractive position to hold ahead of the EU
referendum. We think the curve should steepen as a result of risk arising from the EU
referendum vote, but we also like the position more generally in the current environment
as outlined in our 2016 global rates outlook.

Brexit: Breaking up is never easy, or cheap 19

25 January 2016

The curve tends to have relatively strong correlation with the currency, steepening when
sterling weakens (Exhibit 34). As the currency has weakened in the last few weeks, the
curve has started steepening. Our FX strategists expect further weakening of GBP against
the EUR, targeting EURGBP at 0.77 in three months, which we believe should lead to
further curve steepening. Uncertainty around the EU referendum vote is also likely to lead
to further currency weakness.

Exhibit 33: 10s30s tended to steepen ahead of the Exhibit 34: GBP 10s30s curve steepener is
Scottish referendum consistent with a weaker GBP FX

Difference between other day values and the value at 0, in bp

50 0.825

5 0.800
0.775
Change in bp 40 0.750
0.725
0 30 0.700
31-Dec-15
20

-5

-20 -10 0 10 10

Days around Scottish referendum 01-Jul-14 30-Dec-14 01-Jul-15

10s30s GBP-USD box 10s30s GBP GBP 10s30s EURGBP fx, rhs

Source: Credit Suisse Locus Source: Credit Suisse Locus

Emerging market stress more important driver for potential flows from
overseas investors

A significant risk for the UK would be selling by foreign holders of UK assets. Overseas
investors are the third largest holders of UK gilts after monetary financial institutions and
insurance companies and pension funds. The latest numbers, Q3 2015, from the UK DMO
suggest that overseas investors still own around 26% (see Exhibit 35).

Exhibit 35: Overseas investors own approximately Exhibit 36: Foreigners weren't significant sellers of
26% of the gilt market gilts around the Scottish referendum but tended to
sell gilts in 2015
As of Q3 2015, total gilts outstanding: £1.65trn
In £ bn

10

Other 5
14%

Monetary 0
Financial
Institutions -5

33%

Overseas -10
holdings
Insurance -15
26% Companies

and -20
Pension
Jan-13 Oct-13 Jul-14 Apr-15
funds
27% Monthly change in overseas holdings

Monthly change in overseas holdings around Scottish referendum

Source: Credit Suisse, DMO Source: Credit Suisse, Bank of England

Brexit: Breaking up is never easy, or cheap 20

25 January 2016

Overseas investors were net-buyers of UK gilts ahead of the Scottish referendum, buying
approximately £26bn of gilts in the 12 months leading into the vote. However, when polls
in August 2014 suggested that the Scottish referendum could be a close call, foreign
investors sold approximately £4.2bn of gilts in August and September 2014. However,
once the Scottish referendum was done overseas investors were significantly stronger
buyers of gilts, buying approximately £70bn between Dec 2014 and Nov 2015 (see Exhibit
36). Therefore, we believe the EU referendum could cause foreign investors to slow down
their gilt purchases or even become sellers if polls suggest the referendum is a close call.
In case of a "no"-vote win, we expect them to be sellers.

Expected market reaction for a "no"-win

Should Britain decide to leave the EU after the referendum, i.e. the "no" gains the majority,
we expect significant market moves in UK rates. The front-end is likely to rally
aggressively, as the market prices out any expectations for a hike, with the possibility that
rate cuts get priced.

This should bull steepen the 2s10s and 5s10s curve significantly. The likely fall of sterling
against other currencies should also mean that the UK breakeven curve would flatten. The
better steepener in this scenario is therefore a 2s10s real rate steepener.

The longer-run implications in the rates market are harder to gauge. Our FX strategist
expect a weaker currency, which could lead to a rising inflation near-term. It might also
force BoE raise its policy rate. However, reduced potential GDP growth should lead to
lower rates in the long-run and also to flatter 5s30s and 10s30s curves.

Brexit: Breaking up is never easy, or cheap 21

25 January 2016

RMBS perspectives

Fixed Income Research Analysts EU referendum risk – into the event and afterwards if the UK votes to leave the EU –
impacts UK RMBS via two main channels:
Marion Pelata
44 20 7888 4933 1) Collateral quality evolution due to the impact on the economic outlook
[email protected]

Helen Haworth 2) Supply and demand for financial assets, largely related to risk sentiment
44 20 7888 0757 Exhibit 37 summarizes the main economic and interest rate views, as discussed in
[email protected] previous sections, along with our main RMBS views. It is important to distinguish between
the short-term and medium-term implications for a view on likely market reaction.
Carlos Diaz
44 20 7888 2414 Exhibit 37: Immediate and medium-term impact of Brexit
[email protected]

Immediate Medium-term
Stabilization/ limited weakening
Currency Strong fall in sterling
Lower terminal rate
Rates Aggressive rally in the front-end; 2s10s
steepening Weaker growth rate
Will depend on what falls more, supply or demand
GDP Significant level drop Will depend on the UK’s access to the Single Market
Outflows due to reduced immigration and UK status as a
Inflation Limited fall in prices financial hub
Higher spreads based on reduced quality of the
Financial assets Increase in risk premium and volatility collateral
Lower demand/ incentives for issuers to securitise
Real Estate Slightly down, mainly due to weaker nominal
and real income

RMBS: Higher spreads based on increased risk
premia
Likely pause in issuance

Source: Credit Suisse

Immediate impact: UK non-conforming and BTL spreads would underperform

The immediate impact on the RMBS market would likely be flow-driven. Foreign outflows
driven by uncertainties regarding collateral quality, the level of rates and the currency, as
well as a domestic rotation towards “safe-haven” assets.

We expect the market would continue to price for a low risk of government default; in fact
our rates strategists expect the front-end of the interest rate curve to shift lower. But we
believe the premium demanded for RMBS assets would grow significantly, particularly for
non-liquid/low seniority assets, as well as for pools backed by speculative investment-type
mortgages.

We would therefore expect the RMBS market to underperform both government and
covered bonds, particularly for UK non-conforming and BTL.

We would also expect issuance to dry up, similarly to seen last summer during the period of
elevated Greek uncertainty. We’d expect this to be the case in the UK, but also in Europe.

Medium-term impact: structurally wider spreads and reduced issuance

The medium-term impact would largely depend on the evolution of collateral quality and
investor appetite for UK financial assets, driven by the following:

 the UK economy, in particular growth, inflation and employment;

 immigration, in particular with regard to the London housing market ;

 the potential decline of the UK as a financial hub causing the relocation of companies and
a drop in speculative investment in London real estate assets the UK’s single market
status, and any potential drop in foreign participation as regard to financial assets.

Brexit: Breaking up is never easy, or cheap 22

25 January 2016

If the EU referendum resulted in a vote to leave, we believe that spreads would shift
structurally higher given the negative economic consequences outlined above and the lack
of clarity regarding the UK’s single market status (our understanding is that it could take a
few years for the ultimate outcome to become clear).

Wider spreads and greater uncertainty would also likely result in less appetite from issuers
to use the RMBS market.

Foreign investment is material in UK property and RMBS

Since domestic and buy-and-hold investors are likely to be more captive buyers, ultimately,
a key driver of both spreads and issuance will be the degree of speculative and non-
domestic involvement, both in the underlying property markets and RMBS.

Comprehensive data is hard to obtain, but as shown in Exhibit 38 and Exhibit 39, on some
measures, speculative investment in the UK real estate markets has been increasing,
including by foreign investors. The private rental market has been growing quickly, with an
increasing proportion funded by BTL mortgages. BTL represented 16% of new mortgage
origination in H2 2015, compared to less than 5% in 2009. Non-UK ownership of London
offices has also been increasing rapidly (Exhibit 39).

Exhibit 38: Rental property market keeps Exhibit 39: More than 50% of London offices are
growing, as does BTL funding of it now foreign-owned

35% BTL/Owner-occupied mortgages 60% Middle-East USA
30% Rental/Owner-occupied dwelling stock 50% Japan Germany
25% Europe (ex-GE) Other

20% 40%

15% 30%

10% 20%

5% 10%

0%

1991 0% 2000 2005 2011
1993 1980
1995
1997 Source: Credit Suisse, ONS
1999
2001
2003
2005
2007
2009
2011
2013

Source: Credit Suisse, BoE, CML

The UK RMBS market is also not purely a domestic market (Exhibit 41). We find on
average 19% of foreign participation in most recent deals, which is in line with what the
Gilt market tells us (Exhibit 40). And we saw a trend in 2015 of increased foreign issuance
(Exhibit 42).

There is therefore a clear risk that lower foreign demand for property and/or RMBS could
have a materially negative impact on spreads if UK assets are no longer viewed as
attractive. We would also expect foreign issuance by UK issuers to dry up.

Brexit: Breaking up is never easy, or cheap 23

25 January 2016

Exhibit 40: Gilts holdings as a proxy of foreign Exhibit 41: Recent UK RMBS deals: foreign
interest in UK financial assets participation accounts on average for 19%, mostly
on foreign currencies deals…
Gilt overseas holdings, in % of total central government liabilities

40% Overseas Holdings (Excl. CBs) UK FR/BELUX GE/NL US Other
35% Foreign Central Banks Holdings Duncan Funding 2015-1 - prime standalone RMBS
11%
£1.2bn size with £325mm 87% 1%

30% placed (2.95yr) +70bps 93%
1%
25% €300mm (4.86yr) +48bp 38% 58% 3%
2% 1%
Permanent 2015-1– prime master trust 40%

20%

15% A1 USD 400,000 AAA 7%

1.89

10% A2 GBP 250,000 AAA 2.86 87% 12%

5% Dukinfield 1 – UK non-conforming

0% A3 EUR 500,000 AAA 4.93 16% 12% 69%
87 88 90 92 93 95 97 98 00 02 03 05 07 08 10 12 13 15 A,B,C,D GBP 60%

Source: Credit Suisse, DMO Source: Credit Suisse

However, the market's reaction to the Scottish Referendum was … none!

The last comparable event to the EU referendum is arguably the Scottish referendum in
September 2014 when there was considerable uncertainty regarding how the Scots would
vote. As for other assets classes (see FX and rates sections), it is therefore interesting to
see how RMBS performed into and out of the vote.

And there is no evidence from spread action at that time (Exhibit 43) that there was even a
vote. UK non-conforming spreads actually tightened by 50bp in the year leading to the
referendum, and by 10bp in the previous week. There is also no evidence of any
weakness in deals that had a high concentration of Scottish exposure.

Exhibit 42: … and foreign currency issuance has Exhibit 43: UK non-conf RMBS didn’t repriced for
picked up a lot in 2015 the Scottish RMBS

Quarterly issuance for RMBS, in % of £ billion equivalent , P: Prime, NP: Non-prime Spreads, in bps

100% GBP - P
90% GBP - NP
80% EUR - NP
70% EUR - P
60% USD - P
50%
40%
30%
20%
10%
0%

Source: Credit Suisse Source: Credit Suisse Locus, Markit

Brexit: Breaking up is never easy, or cheap 24

25 January 2016

When and how should investors act?

The difficulty with the UK RMBS market, as illustrated by price action around the Scottish
referendum is that spreads are likely to be slow to move ahead of time, but if the vote is
negative, liquidity is likely to have disappeared.

For investors concerned about the outcome, it therefore makes sense to either reduce risk
early, or to hedge via other, more liquid asset classes, then are likely to reprice sooner.

The first time that it may make sense for RMBS investors to look at entering positions to
protect against a possible vote to leave the EU may be in February when Cameron
provides the details of the deal he manages to strike with the EU. The extent of the deal
and the political response in the UK (and euro area) should provide the first indication of
how volatile and uncertain the months ahead may be.

Given the high level of domestic investment in the RMBS, the majority of any decline in
demand seen around a vote to leave the EU we'd expect to be temporary, with domestic
investors returning once market sentiment had stabilized. Spreads should be higher to
reflect the likely weaker economic outlook, and foreign-currency issue is likely to dry up,
but domestic issuance we'd expect to continue.

Continental European ABS would also likely be impacted

We’ve focused on the implications for UK RMBS, but we think continental European ABS
is also likely to be impacted if there is a period of heightened uncertainty regarding the
UK’s position within the EU.

The clearest follow-through would likely be to other countries that are viewed as at risk of
following the UK in asking for greater independence. As we saw with the Scottish
referendum vote, the market tends to focus on Spain and the Catalan calls for
independence, and so we’d expect weakness in Spanish ABS spreads.

However, more generally, a withdrawal of the UK from the EU we believe could have
much broader ramifications for the future of the EU and potentially euro area, which is
likely to lead to a repricing of risk across European assets. Spread widening is likely to be
greatest in those countries viewed as riskiest and as benefiting most from being part of the
euro area. We would therefore expect further divergence between peripheral assets
(Spain and Portugal in particular) and Dutch RMBS.

PLEASE REFER TO THE FIXED INCOME RESEARCH DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT FOR
IMPORTANT DISCLOSURES.

Brexit: Breaking up is never easy, or cheap 25

25 January 2016

Equity Research: Global Equity Strategy

Brexit riskEquity Research Analysts

Andrew Garthwaite Summary: There are three key trades we have been recommending which we would
44 20 7883 6477 reiterate in the case of a Brexit: i) to continue to gain exposure to UK-listed names with
significant Continental European exposure; ii) long FTSE 100 versus FTSE 250; iii)
[email protected] continue to be cautious of UK domestic cyclicality (not only is UK growth slowing more
than expected, but potential output could slow significantly under a Brexit, and UK
Marina Pronina domestic cyclical plays – retailing, REITs and homebuilders – tend to underperform when
44 20 7883 6476 sterling weakens). We would be particularly concerned about London property (Berkeley
[email protected] Homes) and UK office REITs (Derwent London, Land Securities and British Land). To play
Brexit worries, we would also be cautious of Scottish-exposed stocks.
Robert Griffiths
44 20 7883 8885 From a regional perspective, we stay benchmark the FTSE 100 as only 21% of earnings
[email protected] are from the UK, thus the weaker sterling might be a net positive, outweighing the hit from
the increased political and growth risk premia placed on UK assets.
Yiagos Alexopoulos
44 20 7888 7536 The investment implications of Brexit

[email protected] There are two general points we would make:

Nicolas Wylenzek
44 20 7883 6480
[email protected]

Alex Hymers
44 20 7888 9710
[email protected]

This section is based on the  A very close call. As highlighted in our piece 10 surprises for 2016, 18 January 2016,
following previously published Equity at least half of the Conservative MPs are likely to vote for leaving the EU (unless major
changes are negotiated). The Labour Party is more ambivalent now than has
Research reports: 10 surprises for historically been the case (the current leader, Jeremy Corbyn, voted against the UK's
2016, Impact of a Yes vote in membership of the EU's precursor, the EEC, in 1975 and warned more recently that he
Scotland and 2016 Outlook: could back a Brexit were workers' rights in the UK threatened by EU legislation) and
Equities, Regions and Macro. the UK's political landscape has become increasingly Eurosceptic. The UK
Independence Party, the most anti-European party, won 12.7% of the vote in the 2015
Please refer to these reports for General Election while the Liberal Democrats (the most pro-EU of the major parties),
more information and important saw its vote share collapse to 8% in 2015.

disclosures.

 Huge uncertainties following a Brexit. We believe that the consequences of Brexit
are potentially underestimated. The UK exiting the EU may act as the catalyst for
another Scottish referendum as well as causing prolonged disunity in the Conservative
Party (which has a majority of just 16 seats) requiring a further risk premium on a
currency with the largest twin deficit in the developed world. Reduced immigration
along with FDI relocation would impact not just growth but also, more importantly,
'trend' growth (with the status of 2.3m EU immigrants living in the UK being uncertain).

 There would be significant uncertainty over financial market access and new legal/trade
treaties would need to be negotiated. All of this would be happening at a time when UK
growth is slowing more than expected and with the employment ratio at an all-time
high, suggesting limited monetary response if there is an 'accident'. Clearly, this would
be the first time EU integration has reversed and thus would probably be a boost to
populist parties elsewhere in the EU.

From an equity perspective we would recommend the following:

Buy UK international earners (especially with Cont. European exposure)

Since September, our core view has been to buy the Continental European earners (we
show key such plays in Exhibit 46). Not only might there be stronger growth in Continental
Europe than the UK in 2016, but also sterling could end up weakening by more than
expected. Sterling is c.20% overvalued against the euro on PPP and there is the largest
twin deficit in the developed world to finance (8% of GDP, with a 3.6% current account
deficit) at a time of increased political risk from many different angles.

Brexit: Breaking up is never easy, or cheap 26

25 January 2016

Exhibit 44: Sterling is almost 20% overvalued Exhibit 45: UK macro momentum is deteriorating
against the euro relative to that of the euro area

40% GBP/EUR - Deviation from PPP 20 1.8
30% GBP overvalued
Euro area vs UK - PMI Manufacturing new
20%
15 orders differential 1.7
10% GBP/EUR, rhs

0% 1.6
10
-10%
GBP undervalued 1.5
5
-20%
1.4
-30%
1995 1997 1999 2002 2004 2006 2009 2011 2013 2016 0
1.3
Source: Thomson Reuters, Credit Suisse research
-5 1.2

-10 1.1

-15 2013 1.0
1997 2000 2002 2005 2008 2010 2016

Source: Thomson Reuters, Markit, Credit Suisse research

We would focus on UK stocks with significant European earnings that are also likely
beneficiaries of a euro area domestic demand recovery.

Exhibit 46: UK listed beneficiaries of a recovery in the euro area

-----P/E (12m fwd) ------ ------ P/B ------- 2015e, % HOLT 2015e Momentum, %

Name Continental Europe Abs rel to rel to mkt % Abs rel to mkt % FCY DY Price, % 3m EPS 3m Sales Consensus Credit Suisse
Sales Exposure Industry above/below above/below change to recommendation rating
(1=Buy; 5=Sell)
average average best

Shanks Group 74% 18.9 111% 37% 2.0 -17% -11.1 3.6 -69.7 -1.4 0.6 2.0 Outperform
Thomas Cook Group 65% 9.9 50% 29% 56.0 200% 14.0 1.5 -23.8 -6.2 -1.0 2.6 Outperform
Berendsen 63% 17.5 102% 74% 3.6 57% 5.8 3.0 -23.6 -0.9 0.0 2.3 Neutral
Vodafone Group 58% 40.8 279% 252% 0.3 -95% -0.1 5.2 49.3 -9.9 -0.3 2.4 Outperform
Bodycote 57% 14.3 97% 54% 1.9 -2% 5.4 2.7 23.0 -4.9 -3.2 1.8 Outperform
Computacenter 54% 16.7 86% 75% 3.1 14% 5.3 2.4 -7.0 0.0 0.0 2.0 Outperform
Sthree 43% 17.7 103% 20% 8.4 32% 2.8 4.1 12.6 0.1 7.6 1.9 Neutral
Kingfisher 40% 15.7 72% 26% 1.3 -33% 4.4 3.0 19.4 -3.1 -1.0 3.0 Outperform
Imperial Tobacco Gp. 40% 14.5 83% 35% 6.3 -80% na 4.1 -32.3 -0.6 -6.7 2.5 Outperform
Wpp 34% 15.7 95% 4% 2.6 -77% 5.1 3.0 -1.1 -1.0 0.4 2.1 Outperform
Smith & Nephew 26% 20.1 124% 26% 2.6 -45% 4.5 1.8 -46.8 -1.2 -0.8 2.2 Neutral
Premier Farnell 25% 8.8 80% -37% 5.5 -86% 8.5 6.9 -8.2 -7.5 0.2 2.3 Neutral
Elementis 24% 14.8 105% 54% 2.9 59% 5.5 4.5 2.2 -3.2 -4.7 2.4 Outperform
Halma 23% 23.3 213% 62% 5.8 45% 3.9 1.5 -35.9 0.1 2.4 2.6 Outperform
Regus 22% 27.3 160% 29% 527.3 2010% 5.2 1.5 -64.9 0.8 0.6 2.0 Outperform
Renishaw 21% 16.3 150% -5% 3.0 -22% 3.7 2.6 26.0 -2.7 -3.5 2.6 Neutral

Source: MSCI, IBES, Thomson Reuters, Credit Suisse HOLT, Credit Suisse Equity Research estimates

We would also buy UK stocks with US exposure. Sterling is simply following the two-year
note differential (suggesting limited political risk). Nevertheless, we favour European
exposure as we currently have more confidence in the European, rather than the US,
economic cycle.

Brexit: Breaking up is never easy, or cheap 27

25 January 2016

Exhibit 47: Sterling is simply following the two-year Exhibit 48: Despite having weakened, GBP is still
note differential against the dollar, suggesting only valued in line with PPP against the dollar
limited political risk is being priced in
40% GBP/USD - Deviation from PPP
0.6 30% GBP overvalued
1.70 20%

0.4 10%
1.65
0%
0.2
1.60 -10%

0.0 1.55 -20%

-0.2 1.50 -30%
-40% GBP undervalued
-0.4 UK 2y yield minus US 2y yield 1.45
GBP/USD, rhs -50%
-0.6 1.40 1972 1979 1986 1994 2001 2008 2016
2013 2014 2015 2016
Source: Thomson Reuters, Credit Suisse research
Source: Thomson Reuters, Credit Suisse research

We screen below for Outperform-related stocks under Credit Suisse coverage with

significant US exposure. Of these, Ashtead, Shire and Carnival have positive earnings
momentum, upside on HOLT® and trade below their respective industry P/E multiple.

Exhibit 49: Outperform-rated UK stocks with US exposure

-----P/E (12m fwd) ------ ------ P/B ------- 2015e, % HOLT 2015e Momentum, %

Name US sales Abs rel to rel to mkt % Abs rel to mkt % FCY DY Price, % 3m EPS Consensus Credit Suisse
Industry above/below above/below change to 3m Sales recommendation rating

average average best (1=Buy; 5=Sell)

Ashtead Group 73% 11.1 79% -15% 4.3 94% -4.8 1.8 46.8 1.8 0.6 1.9 Outperform
Shire 4.4 0.5 19.3 1.0 -0.1 1.9 Outperform
Wolseley 60% 13.6 87% -40% 7.8 64% 4.5 2.8 6.5 -1.6 -0.7 2.5 Outperform
Senior 6.1 2.9 78.2 -5.2 -1.1 2.1 Outperform
Experian 55% 12.8 91% 21% 3.2 32% 5.8 2.5 -46.6 -0.7 -1.7 2.1 Outperform
Ubm 7.1 4.3 -56.0 -5.8 -3.1 2.4 Outperform
Carnival 54% 11.2 80% 12% 2.1 -3% 4.8 2.3 30.0 1.7 -1.6 2.5 Outperform

48% 17.3 104% 21% 3.6 18%

48% 13.8 88% 28% 0.8 -90%

46% 15.3 80% 10% 1.2 -23%

Source: MSCI, IBES, Thomson Reuters, Credit Suisse HOLT, Credit Suisse Equity Research estimates

i. Cautious of Scottish-exposed stocks

We believe that in case of a Brexit the pro-EU Scottish National Party is likely to use this
opportunity to pursue a new referendum on whether Scotland should be part of the UK.
Scotland's First Minister Nicola Sturgeon warned in a speech in July last year that there
would be a "strong backlash" in Scotland were the UK to exit the EU. If such a referendum
were to take place and result in a 'yes' vote for Scottish independence, this would be
negative for all the Scottish-exposed stocks, particularly RBS and Lloyds, as an
independent Scotland would likely face a significant fiscal challenge given the fall in the oil
price. We would be nervous of stocks with either a high amount of production (e.g. whisky
for Diageo), asset base (e.g. SSE, oil producers or the banks) or revenue based in
Scotland (e.g. bus companies).

Brexit: Breaking up is never easy, or cheap 28

25 January 2016

Exhibit 50: Stocks exposed to Scotland ------ P/B ------- 2015e, % HOLT 2015e Momentum, %

-----P/E (12m fwd) ------

Name 12m perf rel UK 12m perf rel Abs rel to rel to mkt % Abs rel to mkt % FCY DY Price, % 3m EPS 3m Sales Consensus Credit Suisse
mkt Peer group Industry above/below above/below change to recommendation rating
(1=Buy; 5=Sell)
average average best

Weir Group -42% -46% 10.7 72% -9% 1.2 -52% 14.7 5.3 24.2 -7.2 -3.3 3.1 Outperform
Standard Life na 5.3 -27.9 -3.0 0.6 3.0 Neutral
Pernod-Ricard 3% -2% 15.5 145% 57% 1.8 3% 4.9 1.8 -10.5 -0.9 0.3 2.3 Outperform
SSE 8.5 6.1 5.9 2.9 -0.5 3.2 Neutral
Wood Group (John) 10% -7% 18.0 85% 34% 2.0 -4% 13.2 3.8 -22.3 -2.3 -2.1 2.9 Not Rated
Royal Bank Of Sctl.Gp. na 0.1 45.5 -8.5 -8.0 2.6 Not Rated
Murray Intl. 9% 3% 12.8 87% 14% 5.4 46% na na na na 1.0 Not Rated
Amec Foster Wheeler -0.4 7.6 na -17.6 -2.4 2.6 Not Rated
Stagecoach Group 21% 34% 10.3 50% -11% 1.6 -38% 8.0 3.9 -73.2 -2.6 0.7 2.9 Not Rated
First Group 5.7 0.2 -22.2 5.7 -3.3 2.4 Not Rated
Lloyds Banking Group -18% -21% 10.7 110% -31% 0.6 -66% na 3.4 -67.5 -6.5 -1.9 2.3 Not Rated
Aggreko 6.6 3.2 9.4 -5.4 -1.8 3.2 Neutral
Diageo -15% -18% na na na 0.8 -19% 4.6 3.2 35.1 -1.6 -1.1 2.5 Outperform
Aberdeen Asset Man. na 7.7 -33.2 -19.7 -6.1 3.1 Neutral
Petrofac -45% -40% 6.5 31% -45% 0.7 -79% -0.8 6.5 9.6 -20.4 -0.8 2.4 Not Rated
11.6
-15% -21% 9.9 71% 39% 9.7 -43%

6% -2% 8.8 63% -14% 0.9 -88%

-1% -6% 8.6 89% -42% 1.0 -65%

-39% -43% 11.7 68% -26% 5.7 7%

7% -9% 19.6 93% 37% 5.9 3%

-37% -40% 10.3 86% -26% 1.9 -32%

29% 42% 19.5 94% 59% 1.8 -67%

Source: MSCI, IBES, Thomson Reuters, Credit Suisse HOLT®, Credit Suisse Equity Research estimates

ii. Buy FTSE 100 over FTSE 250

In our 2016 outlook we had an overweight stance on large versus small or mid cap in the
UK. The following issues related to Brexit also favour FTSE 100 over FTSE 250:

 Small and mid-cap companies are much more domestically focused and thus
underperform if sterling weakens, UK growth stalls (as proxied by PMIs) or potential
growth in the UK is revised down on a change in immigration policy (with all three being
likely, in our view).

Exhibit 51: UK composite PMIs are consistent with Exhibit 52: Sales exposure by region for FTSE 100,
small cap underperforming FTSE 250, FTSE small cap: small caps have 3x
higher domestic exposure than large caps
70 UK manufacturing PMI new orders 0.80
70%

65 FTSE small cap / FTSE 100, rhs 0.75 60% FTSE small cap (ex Inv. Trusts)

0.70 50% FTSE 250
60 FTSE 100

0.65 40%

55 0.60

50 0.55 30%

45 0.50 20%
0.45
10%
40
0.40

35 0.35

30 0.30 0% Europe GEM US Japan
1995 1997 2000 2003 2005 2008 2011 2013 2016 UK

Source: Thomson Reuters, Markit, Credit Suisse research Source: Thomson Reuters, Credit Suisse research

 Small cap should have performed much worse given the recent sterling weakness and
the rise in credit spreads.

We would, however, highlight that UK small caps are not expensive and have very limited
exposure to the commodity sector, which is also the reason for their recent
outperformance.

Brexit: Breaking up is never easy, or cheap 29

25 January 2016

Exhibit 53: Weaker sterling tends to be a negative Exhibit 54: UK small caps relative to large caps are
for UK small caps trading around average on P/E

0.75 FTSE small cap / FTSE 100 120 150% FTSE small cap 12m fwd PE rel large cap
TW£, rhs 115 140% Average (+/- 1SD)
110 130%
0.70 105
100 120%
0.65 95
110%
0.60
100%

0.55 90 90%

0.50 85 80%
80
70%
0.45 75
60%

0.40 70 50%
2000 2002 2004 2007 2009 2011 2014 2016 2006 2008 2010 2012 2014 2016

Source: Thomson Reuters, Credit Suisse research Source: Thomson Reuters, Credit Suisse research

iii. Stay underweight UK domestic cyclicality

We went underweight UK cyclicality in September 2015 (see Regional allocation, 25
September 2015) and would continue to support this view in case of a Brexit:

 Reduced 'trend' growth in the UK. The latest employment data showed the
employment of EU nationals living in the UK was up nearly 200k over the last 12
months, a number representing nearly 1% of the workforce, a long way from the 'tens of
thousands' Prime Minister Cameron aimed to reduce net migration to. Thus, if
immigration from the EU is stopped, the potential growth rate (which is the growth rate of
the labour force plus the growth rate of productivity) could fall by a third in a worst-case
scenario. This impact would even more severe if some of the 2.3m EU citizens living in
the UK were forced to leave the country or FDI was repatriated (which has been 4% of
GDP a year, part of which has been to exploit access to the EU with the relative
flexibility of UK labour laws).

Exhibit 55: Net migration from the EU into the UK has picked up strongly in
recent years

+ 300 Long-term international net migration by citizenship, 000's
+ 250 EU Citizens
+ 200 Non-EU Citizens
+ 150 British Citizens

+ 100

+ 50

0~

- 50

- 100

- 150
1975 1980 1985 1990 1995 2000 2005 2010 2015

Source: Office for National Statistics, Credit Suisse research

Brexit: Breaking up is never easy, or cheap 30

25 January 2016

 Regulatory uncertainty, which could be bad for financial services and thus bad for
UK growth. Our economists discuss this above; we would merely stress that financial
services account for 8% of the UK economy's total gross value added but because the
UK has a surplus on the current account of c.3.5% of GDP in financial services, then it is
arguably in the EU's interests to limit UK market access.

 Unstable coalition, a host of potential problems and generally less corporate
friendly policies. Not only is there a Scottish issue (as highlighted above) but the other
potential political consequences of a vote for a Brexit could be a prolonged disunity in
the Conservative Party and/or the resignation of Prime Minister Cameron (recalling that
Cameron has stated he will not serve a third term). Such a loss of party discipline or
leadership of the government could lead to further discount on UK assets at a time when
the UK has the highest twin deficits in the developed world.

Once an EU exit has been agreed, the Lisbon Treaty allows for two years of negotiation
before withdrawal. The legal challenges of a Brexit would be immense: national laws
that have been changed to implement EU laws may have to be reviewed (with the
European Court of Justice being the most senior court); there is uncertainty around the
status of 2.2m UK citizens living in EU countries and 2.3m EU citizens living in the UK;
and new trade treaties would have to be organised both with the EU and with non-EU
nations (50% of the UK's trade is with the euro-area and Switzerland has required 120
bilateral treaties with euro area members to secure trade access). Furthermore, non-EU
members Norway and Switzerland both make payments to the EU budget, hence new
budget negotiations are very likely.

This set of Brexit-related political risks is further compounded by a corporate
environment in the UK that recently became less business friendly (the National Living
Wage or apprenticeship levy being two clear examples).

 There appears to be UK economic slowdown, even before we consider Brexit. A
number of factors appear to be indicating a moderation in growth; both service sector
PMIs and vacancy growth point toward growth slowing down while Brexit worries only
add to this with corporates likely to postpone investment and employment decisions.

Exhibit 56: PMI services new orders are now Exhibit 57: The pace of vacancies added appears to
consistent with a moderation in growth have peaked and is now slowing

UK Services PMI new orders 8% 3.5 40
6% Employment, y/y% 30
65 UK GDP % chg Q/Q annualised, 3m lag (rhs) Vacancies, y/y%, lead 3m, rhs 20
10
60 4% 2.5

2% 1.5
55

0%

50 -2% 0.5 0

45 -4% -10
-0.5
-6%
40 -20
-1.5
-8%
-30

35 -10% -2.5 -40
1998 2002 2007 2011 2016 2003 2005 2007 2009 2011 2013 2016

Source: Thomson Reuters, Markit, Credit Suisse research Source: Thomson Reuters, Credit Suisse research

Brexit: Breaking up is never easy, or cheap 31

25 January 2016

 Monetary flexibility to slower UK growth or a UK Brexit accident might be limited.
UK private sector wage growth is now at 2.3% from a low, in early 2015, of 1% at a time
when the employment ratio is at an all-time high. This might limit the MPC's flexibility
and ability to respond to slower growth.

 The domestic UK names have been very sterling sensitive. Two clear examples of
domestic sectors that would suffer from sterling weakness are REITs and retailing. Not
only because, in the case of retailing, much of the sourcing is international but also a
weaker sterling raises the interest rate risk (10% off sterling adds 1% to inflation, and 1%
higher rates across the curve would take 0.5% off consumption with c.50% of household
debt being floating rate).

Exhibit 58: The UK retailing sector tends to Exhibit 59: …as does the UK REITs sector
underperform as sterling weakens…
1.6
110 TWI£, lhs UK general retail relative, rhs 140 UK real estate, price relative, rhs 110
105 2004 2006 Trade-weighted sterling 105
100 130 100
95 1.4 95
90 120
85 1.2
80 110
75
70 100

2002 90 1.0 90

80 85
0.8
70
80
60 0.6

50 75

40 0.4 70
2009 2011 2013 2016 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: Thomson Reuters, Credit Suisse research Source: Thomson Reuters, Credit Suisse research

 Valuations are not supportive for REITs and homebuilders. The valuations of many
of the domestic sectors are particularly extended relative to history. This is especially the
case if we look at the P/B relative of UK REITs or homebuilders, which are trading
significantly above their norm (though valuation premiums appears less extreme on P/E
relatives).

Exhibit 60: UK REITs and homebuilders look extended on P/B relative to the UK market

170% Price to Book relative to UK market 80%
150% UK homebuilders 70%
UK Real estate (RHS)

130% 60%

110% 50%
90%

70% 40%

50%
30%

30%

10% 20%
1995 1998 2002 2005 2009 2012 2016

Source: Thomson Reuters, Credit Suisse research

Brexit: Breaking up is never easy, or cheap 32

25 January 2016

With these more domestic sectors, we also have the following concerns:

 UK REITs: This sector is ordinarily underperforms if corporate bond yields rise, if
sterling weakens, is expensive and is seeing a loss in capital discipline (Deloitte highlight
that 11.1m square feet of new commercial space was being built in the six months to the
end of September 2015, up 18% on the previous period, and a seven-year high). The
particular Brexit concerns over and above the issue to do with the corporate bond yield
and sterling is whether London will be a less favoured area for financial services (as
Neville Hill highlights with the loss of EU Single Market Passport and ability to influence
legislation). Finance is a big contributor to London: 703K people work in financial
services in London, of which 143K are employed in banking and 310K work in The City
and Canary Wharf. Additionally, we have had record sovereign wealth buying of London
property and, as highlighted by the fixed income team, over 50% of London office
property is foreign owned (clearly the safe haven status of London office would be
threatened by an EU exit). London office REITs are one of the areas we would worry
about most into a Brexit, and this would include Derwent London, Great Portland
Estates, Land Securities and British Land.

Exhibit 61: UK REITs tend to underperform when Exhibit 62: UK REITs' capex to sales has begun to
sterling corporate bond yields rise move higher

0.31 UK REITS rel market 2.4 1.4
1.3 UK REITs capex to sales
Sterling BBB corporate bond yield, % 2.9 1.2
0.29 (rhs, inv) 1.1
1.0
0.27 0.9
3.4 0.8
0.7
0.25 0.6
0.5
3.9 0.4
0.23
2000 2003 2006 2009 2013 2016
0.21 4.4
Source: Thomson Reuters, Credit Suisse research
0.19 May-14 Sep-14 Jan-15 May-15 Sep-15 4.9
Jan-14 Jan-16

Source: Thomson Reuters, Credit Suisse research

Ultimately also deflation in retail should affect the NAV of those companies who have high
retail REIT exposure (food and non-food deflation is running at -2.7% yoy and -2.3% yoy,
respectively).

 Homebuilders: We can see that housing is becoming much more of a political issue
and this raises the risk of increased regulation to force homebuilders to build, such as
the threat of imposing council tax on unbuilt homes. One of our stock-specific concerns
is that Berkeley Homes appears to be discounting a sharp rise in London house prices,
against a backdrop of risks from reduced immigration or repatriation as well as the
potential hit from a relocation of financial services (with the top 14 investment banks
alone employing 65,000 in London), which would be negatives for high-end London
property. Clearly, this would also affect estate agents.

Brexit: Breaking up is never easy, or cheap 33

25 January 2016

Exhibit 63: Berkeley appears to be discounting a Exhibit 64: London house price/earnings ratio is
large rise in London house prices almost 8x, while the same ratio for the first time
buyers is 10.1x

80% Berkeley, rel UK market, y/y% 25% 11

London house price index, 1yr lag, y/y% rhs UK Halifax: House price/earnings ratio - Greater
London
60% 20% 10

15% 9 UK Nationwide First Time Buyers House
40% price/earnings ratio - London

10% 8

20% 5% 7

0% 0% 6

-5% 5
-20%
4
-10%
-40% -15% 3

-60% -20% 2
2002 2004 2006 2008 2010 2012 2014 2016 1981 1986 1991 1996 2001 2006 2011 2016

Source: Thomson Reuters, Credit Suisse research Source: Thomson Reuters, Credit Suisse research

 UK retailing: The sector typically moves in line with UK retail sales volumes, which
have clearly rolled over. The rise of the internet is threatening margins (on BRC data,
online sales now account for nearly 20% of total non-food sales) with virtual capacity
rising at c.12.7% a year and physical capacity rising at c.1.1%, leading to total capacity
growth of 3.5% – ahead of consumption growth. The only near-term support is that they
have not priced in the fall in the oil price and the sector has become cheap again (on
P/E relative to the market) since our downgrade to underweight.

Exhibit 65: The sector has continued to outperform Exhibit 66: But retailers don't appear to have priced
despite slower growth in non-food sales in the falling oil price

8 Non-food store sales volume, % change Y/Y, 3mma, 6m 1.3 50% General retail price relative, y/y% change -100%
lag 1.2 40% Oil price, y/y% change, rhs, inverted

General retail relative, rhs 30% -50%
6

4 1.1 20%

1.0 10% 0%
2
0%
0.9
0 -10% 50%

0.8 -20%

-2 0.7 -30% 100%

-40%

-4 0.6 -50% 150%
2005 2006 2008 2010 2011 2013 2014 2016 1991 1994 1997 2000 2003 2006 2010 2013 2016

Source: Thomson Reuters, Credit Suisse Equity Research estimates Source: Thomson Reuters, Credit Suisse Equity Research estimates

 UK-focused professional employment agencies: Into a domestic slowdown that is
exacerbated by Brexit, these stocks would clearly be impacted (they tend to follow
employment PMIs). Of these, the most UK-centric professional employment agencies
would be Hays, Robert Walters and Michael Page (34%, 24% and 33% of sales
respectively).

Brexit: Breaking up is never easy, or cheap 34

25 January 2016

Exhibit 67: The UK retailing sector is trading at a 6% Exhibit 68: The relative performance of UK
P/E discount to the market, compared to an average employment agencies tracks employment PMIs
7% premium

150% UK Retailing: 12m fwd. P/E rel. to mkt Average (+/- 1 SD) UK employment agencies relative 60

140% 200 UK composite employment PMIs, rhs 58

130% 180 56
54
120%
160 52
110%

100% 50
140

48

90% 120 46

80% 44
100
70%
42

60% 80 40
1995 1998 2002 2005 2009 2012 2016 2003 2005 2008 2010 2013 2015

Source: Thomson Reuters, Credit Suisse research Source: Thomson Reuters, Markit, Credit Suisse research

Below we show a list of stocks with high UK exposure which, from a top-down perspective,
could be negatively impacted by the challenges discussed above.

Exhibit 69: Stocks potentially impacted negatively by a possible Brexit

-----P/E (12m fwd) ------ ------ P/B ------- 2015e, % HOLT 2015e Momentum, %

rel to rel to mkt % rel to mkt % Price, % Consensus
Industry above/below above/below
Name Abs Abs FCY DY change to 3m EPS 3m Sales recommendation Credit Suisse rating
average average
best (1=Buy; 5=Sell)

Sse 12.7 87% 18% 5.2 44% 8.9 6.3 -1.3 2.6 0.2 3.2 Neutral
Lloyds Banking Group 8.8 96% -38% 0.9 -66% 2.3 Not Rated
Royal Bank Of Sctl.Gp. 12.2 132% -18% 0.5 -68% na 3.6 5.1 -5.3 -1.8 2.6 Not Rated
Standard Life 13.4 127% 42% 1.8 5% 2.8 Neutral
Berkeley Group Hdg.(The) 10.1 67% 44% 2.9 88% na 0.1 40.5 -10.1 -7.8 2.4 Neutral
Derwent London 44.8 200% 40% 1.4 42% 2.4 Neutral
Land Securities Group 23.3 104% 24% 0.8 -10% na 5.3 -28.8 -1.1 0.6 2.0 Neutral
British Land 20.9 94% -4% 0.9 -1% 2.3 Underperform
Great Portland Estates 54.2 242% 92% 1.1 16% na 5.3 63.7 2.9 3.1 2.0 Outperform
Foxtons Group 13.9 62% -11% na 3.0 Neutral
Hays 12.5 75% -23% 6.0 na 1.8 1.3 8.5 1.1 -0.3 2.1 Neutral
Michael Page Intl. 16.3 98% -21% 5.5 -63% 2.4 Underperform
Marks & Spencer Group 11.6 58% -11% 2.2 -39% na 3.1 35.7 1.8 -1.8 2.7 Underperform
Next 14.8 74% 22% 31.6 -39% 2.8 Underperform
Legal & General 11.8 112% -9% 2.4 88% 4.2 4.0 34.8 0.0 2.1 2.5 Neutral
Whitbread 15.4 81% 43% 4.0 2% 2.4 Outperform
94% 1.3 1.2 -7.2 1.9 1.9

na 6.1 -17.3 -2.2 -0.2

19.0 2.0 81.6 -0.8 0.0

5.8 3.4 -12.2 -1.6 2.5

7.1 4.4 33.1 -0.5 -1.3

3.9 5.1 -9.4 -1.3 -1.0

na 5.6 -23.3 0.0 na

-3.4 2.3 13.9 -0.2 -0.6

Source: MSCI, IBES, Thomson Reuters, Credit Suisse HOLT®, Credit Suisse Equity Research estimates

iv. We stick to our benchmark of UK equities

Ironically, the overall impact of a Brexit on the FTSE in local currency terms might be a
small positive. The critical issue is that only 21% of FTSE earnings come from the UK,
thus, not surprisingly, the weaker sterling becomes, the better UK equities perform.

Brexit: Breaking up is never easy, or cheap 35

25 January 2016

Exhibit 70: The UK market tends to outperform as Exhibit 71: With only c.21% of sales for large cap
sterling weakens (and vice versa) UK equities originating domestically

MSCI UK rel to World (local currency) 70

5.5 Trade-weighted Sterling, rhs, inverted

5.3 75

5.1 80 Regional sales, % FTSE 100 Euro Stoxx 50 S&P 500
of total
4.9 85 23.3% 57.7% 6.1%
Europe 21.1% 2.0% 1.1%
4.7 90 UK 19.5% 17.3% 71.3%
4.5 North America 26.3% 17.8% 6.5%
GEM 9.7% 5.2% 15.1%
95 Others 100% 100% 100%
4.3 Total

100
4.1

3.9 105

3.7 110
2002 2004 2006 2009 2011 2013 2016

Source: Thomson Reuters, Credit Suisse research Source: Thomson Reuters, Credit Suisse research

The critical influence on the UK market is the behaviour of emerging markets and
commodities (with nearly 40% of earnings coming from these two sources).

Exhibit 72: UK equities have tracked the relative Exhibit 73: Commodities now a greater share of
performance of GEM equities down in recent years market cap in the UK than in emerging markets

150 5.5 11%

EM relative - local UK relative - local, rhs 10% 10% Share of market cap
Oil & Gas Mining
140 5.3

5.1 8%
130 8%

4.9

120 4.7 6%
5%
110 4.5 4% 1%
4% 0%
4.3 0%
100 2% Euro area Japan
2%
4.1
90 3.9 0%
0%
80 3.7
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 UK Emerging US
markets
Source: Thomson Reuters, Credit Suisse research
Source: Thomson Reuters, Credit Suisse research

However we would highlight that in spite of the UK underperformance, ex-resources, the
market is not looking particularly cheap on either P/E or P/B relatives to global equities.

Brexit: Breaking up is never easy, or cheap 36

25 January 2016

Exhibit 74: The UK is not cheap when we look at Exhibit 75: …with P/B relative in line with its history
sector-adjusted P/E relative… at around a 7% premium

1.10 1.30
UK ex resources, 12 month forward PE relative to Global UK ex resources, PB relative to Global

1.05 1.20

1.00 1.10

0.95 1.00

0.90 0.90

0.85 0.80

0.80 0.70
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
0.75
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: Thomson Reuters, Credit Suisse research

Source: Thomson Reuters, Credit Suisse research

PLEASE REFER TO THE EQUITY RESEARCH DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT FOR
IMPORTANT DISCLOSURES.

Brexit: Breaking up is never easy, or cheap 37

Companies Mentioned (Price as of 19-Jan-2016)

Aberdeen Asset Management (ADN.L, 228.3p)
Aggreko (AGGK.L, 805.5p)
Ashtead Group (AHT.L, 968.0p)
Berendsen (BRSN.L, 1039.0p)
Berkeley Group Holdings Plc (BKGH.L, 3572.0p)
Bodycote Plc (BOY.L, 520.0p)
British Land (BLND.L, 715.0p)
Carnival (CCL.L, 3733.0p)
Computacenter (CCC.L, 822.5p)
Derwent London (DLN.L, 3258.0p)
Diageo (DGE.L, 1828.0p)
Elementis (ELM.L, 203.6p)
Experian (EXPN.L, 1152.0p)
Foxtons (FOXT.L, 172.25p)
Great Portland Estates (GPOR.L, 756.0p)
Halma (HLMA.L, 812.0p)
Hays (HAYS.L, 117.6p)
Imperial Tobacco (IMT.L, 3559.5p)
Kingfisher (KGF.L, 333.6p)
Legal & General (LGEN.L, 244.5p)
Marks & Spencer (MKS.L, 421.7p)
Michael Page (MPI.L, 392.5p)
Next (NXT.L, 6685.0p)
Pernod-Ricard (PERP.PA, €98.73)
Premier Farnell (PFL.L, 95.25p)
Regus (RGU.L, 293.9p)
Renishaw (RSW.L, 1615.0p)
SSE (SSE.L, 1423.0p)
SThree (STHR.L, 298.5p)
Senior (SNR.L, 212.0p)
Shanks Group PLC (SKS.L, 90.0p)
Smith & Nephew (SN.L, 1107.0p)
Standard Life (SL.L, 364.6p)
Thomas Cook Group plc (TCG.L, 108.5p)
UBM plc (UBM.L, 500.5p)
Vodafone Group (VOD.L, 216.8p)
WPP (WPP.L, 1447.0p)
Weir Group (WEIR.L, 840.5p)
Whitbread (WTB.L, 3952.0p)
Wolseley (WOS.L, 3367.0p)

Equity Research Disclosure Appendix

Important Global Disclosures
The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in
this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was,
is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total
revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months.
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*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return re lative to the analyst's coverage universe which
consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and
Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return
relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector , with Outperforms representing the most
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Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation
of the sector* relative to the group’s historic fundamentals and/or valuation:
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Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 55% (36% banking clients)

Neutral/Hold* 32% (28% banking clients)

Underperform/Sell* 12% (42% banking clients)
Restricted 1%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond
to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relati ve basis. (Please refer to definitions
above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and othe r individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the
market that may have a material impact on the research views or opinions stated herein.
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Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-
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Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be
used, by any taxpayer for the purposes of avoiding any penalties.
See the Companies Mentioned section for full company names
The subject company (ADN.L, DGE.L, ELM.L, FOXT.L, GPOR.L, HLMA.L, IMT.L, KGF.L, LGEN.L, PERP.PA, SSE.L, SN.L, SL.L, TCG.L, WEIR.L)
currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (FOXT.L, IMT.L, SSE.L, TCG.L) within the past 12 months.
Credit Suisse provided non-investment banking services to the subject company (SL.L) within the past 12 months
Credit Suisse has managed or co-managed a public offering of securities for the subject company (SSE.L) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (FOXT.L, IMT.L, SSE.L, TCG.L) within the past 12
months.
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (ADN.L, AHT.L, CCL.L, DGE.L,
ELM.L, FOXT.L, GPOR.L, HLMA.L, IMT.L, KGF.L, LGEN.L, MKS.L, PERP.PA, PFL.L, SSE.L, SN.L, TCG.L, WEIR.L) within the next 3 months.
Credit Suisse has received compensation for products and services other than investment banking services from the subject company (SL.L) within the
past 12 months
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (BLND.L, CCL.L, DGE.L,
EXPN.L, IMT.L, KGF.L, MKS.L, MPI.L, RGU.L, VOD.L).
Credit Suisse has a material conflict of interest with the subject company (WEIR.L). Richard Menell, a Senior Advisor of Credit Suisse, is a board
member of Weir Group Plc (WEIR.L).

For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-
suisse.com/disclosures or call +1 (877) 291-2683.

Important Regional Disclosures
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Credit Suisse Securities (Europe) Limited (Credit Suisse) acts as broker to (ADN.L, BOY.L, CCC.L, FOXT.L, HLMA.L, IMT.L, KGF.L, SSE.L, TCG.L,
UBM.L).
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EXPN.L, GPOR.L, HLMA.L, HAYS.L, IMT.L, KGF.L, LGEN.L, MKS.L, MPI.L, NXT.L, PERP.PA, PFL.L, RGU.L, SSE.L, SN.L, SL.L, TCG.L, UBM.L,
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Credit Suisse Securities (Europe) LimitedAndrew Garthwaite ; Marina Pronina ; Robert Griffiths ; Yiagos Alexopoulos ; Nicolas Wylenzek ; Alex
Hymers

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Fixed Income Research Disclosure Appendix

Important Global Disclosures
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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can
be eroded due to changes in redemption amounts. Care is required when investing in such instruments.

When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a
seller, you will be requested to pay the purchase price only.