How will the EU referendum affect your investments?

29 March 2016

But what does it mean for our investments in equities? In the run-up to the referendum, we are likely to see a lot of ups and downs in the stock market.

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.

If you want to go really defensive, but have a fund manager to decide the asset allocation for you, consider the Jupiter Distribution, Premier Defensive Growth or Schroder MM Diversity funds.