As with all scenarios, half of the tactics is to be correctly positioned, with flexibility, prior to the event. We are already seeing European, and not just the U.K., markets gradually deteriorating in advance of the vote.
How much of that is directly attributable to the forthcoming vote is difficult to ascertain, as there are other factors that have a bearing, with the principle amongst them being an expectation that EU growth will generally be much lower in the next couple of years than had been previously forecast, but the vote is having some influence.
Such market nervousness was almost inevitable. Although it now appears that the vote is going to be much closer than would have been expected, say, two months ago, the history of the polling results actually indicates an high level of volatility in the voting intentions.
Strangely, the weight of money being bet through the bookmakers and on peer-to-peer betting sites like BetFair is still strongly anticipating a Remain vote. For those who feel the need to to hedge against a Leave outcome, that is certainly one route, but my preference is through the equities markets.
I raised a significant volume of cash earlier in the year, partly because I shared market concerns that the global economy was not looking very good, but also because I wanted to be ready for what I believed would be depressed prices in the month before the vote. I am now buying back some of those stocks because they are available at lower prices, despite the fundamentals remaining good.
The risk that I am running is that after the vote, they may get cheaper still. There is a general consensus, including the opinion of at least one academic paper, that in the event of a Leave vote, the sterling will fall in value by around 10% to 35%. I think that the higher end of the range is too extreme, but even 10% would be significant.
The effect of a fall in the value of the sterling would be a boost to exports (which would become cheaper) and, consequently, an increase in turnover and profits to those companies that are exporters. That includes almost all of the FTSE 100 companies, which on average depend on foreign markets for about 75% of their revenue. Typically, the smaller the company, the less it exports, so the main beneficiaries will be the larger stocks. Conversely, retailer (in particular), which are net importers, will suffer because they will find it difficult to pass on increased prices to their customers.
I am anticipating that, in the event of a Leave vote, there will be knee-jerk reaction, with the U.K. equities market falling dramatically, perhaps with insufficient distinction being made between the individual stocks. While foreign investors may be disinclined to withdraw because of the exchange rate hit that they would have to take, domestic investors will want to avoid the risk of a short-term U.K. economic down-turn, which is a possibility.
My belief is that the economy is strong enough (in relative terms) to withstand a reduction in consumer sentiment and, indeed, confidence might actually rise as the Leave voters revel in the success of their achievement. I will therefore be buying strongly in the period immediately after a leave vote. I suspect that I will be joined by foreign investors, who will see the exchange rate movement as being only short-term – particularly against the euro – and that their pricing in foreign currencies will look too good to resist. They have a track-record of doing just that. They will tend to concentrate on the largest stocks, so my focus may be on the FTSE 250 companies after any inrush.
After the Parliament passes the necessary legislation and notice is served on the EU, the following two years are supposed to involve fairly intense negotiations. It is in the nature of negotiations that they will tend to be concentrated towards the end of the period. In the meantime, we will have a better perspective on what is happening generally in the eurozone. I am not particularly attracted to continental European stocks because I do not like their corporate governance (too much control is exercised by governments and other stakeholders), their lack of transparency, and their generally poor profitability. I believe that they will be negatively affected by the Leave vote, but as I think that they are generally over-priced currently, I see little opportunity in those markets unless they fall dramatically.
The two, or so, years will be a period of increased volatility. There may even be an attempt to have a second vote towards the end, on the basis that “these are the best terms that we can get and do you still want to leave?” (For those that think that such an event is unthinkable, you just have to refer to the history of EU votes in other countries). This will be an ideal trading period. I think that U.K. stocks are, and will continue to represent, good value; you only have to consider recent take-overs – in advance of the vote – to see that, and so do other parties. So I will buy on any significant weakness – and sell on any strength, but with the confidence that some of my holdings, particularly the high-yielding stocks, could remain as long-term investments if their prices remain depressed.
Sentifi – Brexit Widget
Diana Patterson started her career as a student nurse and, after qualifying as a staff nurse, became a ward sister. After a further two years of full-time study, she qualified as a tutor and examiner by the age of 30. Seeking another challenge, she studied for a degree in law while still working full-time. After subsequently qualifying as a solicitor, she practiced in Central London in residential and commercial property and probate. Her main interest outside work was trading in the stock market, with an intention to becoming financially independent. As soon as her portfolio returns exceeded her earnings in the day job, she decided to invest full-time. This was facilitated by the advent of the Internet and the increase in freely available information. She adopts a counter-intuitive approach using her training in psychology, and believes that 2008 was the opportunity of a lifetime. She has survived three bear markets and is in the process of assessing whether the Referendum will offer another such opportunity. She can be reached on Twitter @.
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