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News and Views

The EU referendum in the United Kingdom on 23 June 2016 is being promoted as the biggest vote the British people have had to make in a generation.

Already many of us have reached ‘Brexit’ saturation point but with so many voters remaining undecided and with so much at stake, there will be no let-up in the torrent of articles coming at us in the weeks ahead.

Many investors are concerned as to how to position their portfolios ahead of the vote. The biggest concern that markets must face is the uncertainty that the referendum introduces to an already delicate economy. Businesses are unlikely to make major investment decisions with such potential risks ahead and we are almost certain to see a slowing of the UK economy in the months ahead. There are already some early trends emerging.

Commercial property shares have been hit hard in recent weeks. UK top 100 companies such as British Land and Land Securities, who own significant chunks of office space in London, have fallen a long way below their stated asset values at the time of writing due to concerns that the global financial institutions based in the City of London will up sticks to Paris or Frankfurt if Britain leaves the EU.

Housebuilders are another notable sector where share prices are under pressure, despite the fundamental equation remaining supportive; demand for houses exceeds supply. The issue here is that Britain regaining control of its borders could lead to lower demand for housing as a direct consequence of less growth in the UK population.

These issues are potential direct consequences of an exit vote but there are secondary knock-on effects to consider. Doomsters predict the end of the EU and the collapse of the euro if Britain leaves as others will see that the Euro is not a one-way street. It is possible that countries as prominent as France and Italy, where the general public has grave doubts over European integration, will also face a clamour for a similar referendum with potential huge repercussions for the whole of Europe and the wider world. It could also result in further destabilising referendums in the UK as the Scots may demand a second vote on leaving the UK in order to remain part of the EU.

Some analysts suggest that investors should focus their attention on the largest components of the UK top 100 companies as these companies have global businesses and are less prone to domestic concerns than their smaller brethren amongst the UK top 250 or small-cap indices. This is too simplistic, however, as many UK top 100 companies businesses have models that will be more affected than the more domestically-oriented companies. Leaving the EU will require Britain to negotiate trade deals across the world, which will have a larger impact on those companies with global business models.

The uncertainty is weighing on sterling, which has fallen markedly in recent weeks. This will have a positive effect on our exporters whilst simultaneously increasing the costs of our summer holidays, but the effect is likely to be temporary if the referendum results in a vote in favour of staying in the EU. And therein lies the moral behind the story.

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Whilst it would be dangerous to disregard the risks faced entirely we must put the risks in the context of probabilities. To this end we must bow to the bookmakers, whose analysis is far more accurate than the opinion polls (as proven by last year’s UK General Election result). According to oddschecker.com, the probability of the UK voting to leave the EU is around 33% at present, so the prospect is not a major risk, although there is much campaigning for us still to endure. Such odds suggest that short-term positioning of portfolios ahead of the referendum is unnecessary since stocks that fall furthest in the run-up to the June deadline will bounce the highest as soon as the status quo is maintained. The French would refer to it as a “Laissez-Faire” approach!

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