No prizes for guessing the issue most clients have wanted to talk about in the past few weeks.
As with the Scottish Referendum in September 2014, a vote for change would not mean an overnight change – a period of up to two years of negotiations would ensue to agree an orderly “Brexit.”
Our view is that the issue is potentially very distracting. It will have most significance for investments that are sensitive to the domestic economy and most obviously for the value of Sterling and the Gilt market.
Would prime commercial property suffer if London’s status as a financial centre was diminished? Would the Bank of England try to defend the currency by raising interest rates? Or would it accept the devaluation of the currency and the potential for importing inflation? Will the uncertainty create a hiatus in spending and investment decisions which itself could stifle economic growth?
Far easier to pose such questions than predict the outcome itself or the effects of the change that would take place over the years to follow.
A broad consensus view is that markets are currently priced for a “Stay” outcome and that should the significant “Undecided” vote swing to the “Leave” camp on 23rd June, a further significant fall in Sterling would be likely.
Such an event would not necessarily be a bad outcome for large cap equities as represented by the FTSE 100 index due to the ‘translation’ effect of earnings in overseas currencies and therefore as in previous periods of uncertainty for the currency and UK bond market, holding defensive equity funds might not be the worst strategy. But we think that approach holds good whenever the ‘wall of worry’ looms higher.
We are looking at whether there is anything we might do differently in this context: our initial view is that reducing overall exposure to the smaller end of the UK equity market may be too simplistic a response given that some stocks may benefit and some may suffer – those are judgements for the individual fund managers to make. Although returns from bond funds are expected to be low, neither do we share the view that these assets would necessarily be a safe haven in a crisis.
Instead we are viewing the issue against the backdrop of the slowing global economy: it is yet another excuse/valid reason (delete according to your preference) to be wary of risk assets generally. Further volatility in markets in the short term seems probable; but with three months to go before the vote, is just as likely to result from economic data or corporate earnings news with genuinely global implications rather than the posturing of Messrs Cameron and Johnson.