Market Bulletin Hero

Sheltering Portfolios Around The Brexit Decision

20 May 2016

Chris Darbyshire, Chief Investment Officer

Markets hate uncertainty and the EU Referendum on 23 June is causing enough of that. We look at seven asset classes and try to break down what will happen if we vote remain or if we vote leave.

Capital markets hate uncertainty. And the EU referendum to be held on 23 June is certainly causing enough of that. Meanwhile attention-grabbing media headlines and a reluctance by businesses at home and abroad to invest in the UK ahead of the big decision are causing a crisis of confidence about our prospects for economic growth.

Ahead of the vote and to protect assets as much as possible, we have taken the following steps:

  • Reduced investments in Sterling in favour of US Dollars, Euros and Emerging Market currencies

  • Bought a 3% position in Gold in our balanced portfolio

  • Kept investing in FTSE 100 stocks that see some 75% of their earnings come from outside the UK

  • Reduced investments in the FTSE 250 index and particularly in businesses generally more geared towards the UK and any referendum reactions

  • Maintained a lower allocation toward Gilts since we see foreign investors using them for Sterling exposure (although high prices here have also contributed to our view).

What will it all look like on 24 June, the day after the decision? Here’s our starter for seven:




What will happen to FTSE 100 investments?

The good relative performance of this large company index has been driven more by global industrial trends since the start of the year, and we would expect minimal additional benefits from a vote to remain.

These large companies only have a 20–25% exposure to the UK and there is high exposure to supermarkets, tobacco companies and pharmaceuticals, all of which are less sensitive to the UK’s economic headwinds. Overweighting by UK investors and a weaker Sterling would also support these stocks.

What will happen to FTSE 250 investments?

The flight to safety to large caps in the run up to the referendum could see these smaller stocks suffer. However, while some questions remain about the strength of UK growth over the longer term, we believe that there would be a snap back in sentiment and positive inflows into this market.

These smaller stocks have much higher exposure to the UK domestic economy (50–55%) meaning Brexit could have a more lasting impact. In addition, a continued move towards large caps could see ongoing volatility in this index, particularly as people pick out the exporters from among the ranks.

What will happen with Sterling?

Sterling has been one of the weakest currencies year-to-date and has borne the brunt of heightened negative sentiment. Expect the Pound to rebound if we vote to remain.

With uncertainty set to remain the case for the foreseeable future, and foreign investors unlikely to favour UK assets over others, Sterling would not just remain at current lows but would drop even further.

What will happen to Gilts?

While Gilts may see renewed interest from foreign investors in anticipation of interest rate changes and as a way of tapping into a strengthening Pound, Gilts remain at high prices and it would take unwarranted market moves for us to increase exposure.

Foreign investors hold around 30% of Gilts, often as a proxy for Sterling exposure, but with Sterling set to remain low, investors may reconsider their investments if ratings agencies then downgrade the UK.

What will happen to UK corporate bonds?

Like Gilts, UK corporate bonds remain at high prices as their safe-haven characteristics have trumped their risk characteristics during the run-up to Brexit. We don’t anticipate much difference post-Brexit.

Investment Grade UK corporates are unlikely to be challenged by Brexit. Issuers are typically global companies whose solvency is not in doubt – GlaxoSmithKline, HSBC and Royal Dutch Shell would all be able to meet their obligations.

What will happen to the Euro?

The Euro should strengthen moderately, but would be upstaged by a resurgent Sterling.

We expect the Euro would weaken but Sterling would weaken by more.

What will happen to European Stock Markets?

Aside from the Brexit debate, the recovery in the European economy is looking increasingly sustainable due to rising employment and wages, plus an uptick in government spending. These positive trends are compensating for the weakness in European exports against the backdrop of a strengthening Euro and a slowdown in the UK (the Eurozone’s biggest export market).

Initially there could be a wobble, prompted by fears of political initiatives similar to Brexit taking place elsewhere in Europe. This would probably be followed by a rebound, as investors reassess the relatively small impact of Brexit on the Eurozone economy.


Chris Darbyshire
Chief Investment Officer

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The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.
The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.

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