How will the EU referendum affect your investments?
On 24 June, the result of a vote to stay is pretty easy to gauge: we are likely to see a ‘relief rally’ in the UK stock market, before investors turn their eye once again to global concerns – no doubt with China top of the agenda.
A no vote, however, is more difficult to call, especially in the longer term. No one really knows if we would be better off or not, and there are convincing arguments on both sides. All we do know is that it could take a long time for things to be unravelled.
We’ve been part of the European Union for 43 years. There would be a lot to unwind, and markets could stay volatile – or at least very sensitive – for some considerable time.
In the short term, we can make a few more assumptions. Few in the market currently believe
that Brexit will be the eventual outcome. So it’s fair to say that it is not yet fully ‘priced in’. We can therefore expect more volatility in the coming months, particularly if it looks like a close call.
If we vote to leave, markets will react to the ‘shock’ and there is likely to be a big sell-off – not just in the UK but in European exchanges too. A Brexit could prompt a wider unravelling: a second Scottish referendum would be likely and, if successful, I imagine the Catalonians would fancy their chances of becoming independent of Spain. Markets don’t like uncertainty and the uncertainties would just increase.
In the UK more specifically, there will be winners and losers. Exporters with the bulk of their business in Europe will come under pressure; shares in the property sector are likely to be affected, and financial and retail stocks will probably fall.
Areas such as pharmaceuticals, telecoms and oil majors may fare better, particularly those with overseas earnings from outside Europe. Banks are more complicated as some, with European operations, may well see more red tape to continue their business within the EU.
Stephen Bailey, manager of Liontrust Macro UK Growth, a fund that I rate highly, has taken precautions by holding the maximum allowed overseas companies in the fund. He is favouring pharmaceutical and telecoms companies in the US.
The pound has already weakened on the back of Brexit fears. HSBC says it could devalue by as much as 15%. A run on the pound would not be pleasant. A weaker currency means higher inflation and less money in consumers’ pockets.
Non-sterling assets, on the other hand, will be at an advantage, so if you are a sterling investor in a Global equity fund, you should benefit. I really like the Baillie Gifford Global Discovery and M&G Global Dividend funds.
As always, if you are worried, the predictable answer is to have a portfolio that is nicely diversified between different assets such as equities, bonds, property and cash, so that volatility of your investments can be kept to a minimum.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.