The EU Referendum

On June 23^rd the British public will go to the polls to decide if the UK will remain part of the European Union. While the proposed question is clear, the possible long term outcomes of the referendum are many and varied. As investors, the first obstacle is the pre-vote uncertainty. Polling suggests that the vote will be close enough that with some degree of error the result could go either way. The uncertainty of not knowing will undoubtedly cause significant market volatility. Furthermore, regardless of the long term implications of a vote either way, investors will likely aggressively discount for any perceived negatives. However, these selloffs could become good buying opportunities for the long term investor with a diversified portfolio.

While the most recent poll suggests the Leave campaign side leading the referendum battle, Strawberry believe that the UK will vote to remain part of the EU. Furthermore, as with the Scottish referendum and similar devolutionary votes there is a tendency for voters to go with the status quo when presented with the ballot paper. However, commentators are warning that there will be many unknowns between now and 23^rd June, and that even the weather on the day could alter the outcome.

Therefore, rather than agonising over the referendum’s result, Strawberry believe there may be between now and polling day, yet you should still be cautious to ensure your investments are appropriately protected against volatility. This is particularly important for more cautious investors and those with with lower capacity for loss. You should always remember that whenever you are investing that the value of your investments can go down as well as up and you may get back less than the amount you originally invested.

Referendum Currency Concerns

A major concern for a Brexit is the effect of currency movements on markets and returns. Sterling weakness would result in overseas equities (in £ terms) outperforming UK equities significantly. It is likely that UK equities would be sold off heavily, however, given the overseas earnings nature of a significant proportion of the UK equity market, we would anticipate that larger UK listed companies would rebound strongly as they benefit from foreign currency exposure. However, mid and small cap companies would be (and already have been) effected as they have larger domestic risk. It is difficult to anticipate the impact on company earnings in the event of a Brexit as there are so many unknowns at this stage. Nevertheless, we can be fairly confident that business investment would see significant weakness as decisions are delayed until more details are known. There are already signs of this.

There has already been significant weakness in sterling on the notion of a Brexit and a vote to stay in may result in a partial reversal of these falls. However, sterling weakness could also be attributed to other factors such as the current account deficit. Therefore if the UK did vote to leave the EU, the negative impact on the currency would be greater than the positive movement if we voted to remain.

Regardless of the outcome in this referendum it is important to take a longer term perspective on investments. By keeping a diversified portfolio, volatility is dampened enabling us to take advantage of opportunities as they arise.

If you are unsure as to the suitability of a particular investment or product, need some investor tips, want to learn how to assess investment risk, need help understanding investment definitions and terms, you should seek professional financial advice.