Brexit – A View From Investec

March 1st, 2016

With the much talked about EU Referendum now confirmed for the 23rd June, Investec Wealth & Investment, one of the Discretionary Fund Mangers on the Radcliffe & Co panel, have given their thoughts on how this could affect your investments.

“For the third time in as many years we are faced with a vote that portends disruptive change to the UK political and economic landscape. Following the Scottish referendum and the general election, both of which reached outcomes that were deemed to be market-friendly, the UK population now has to decide whether or not to remain in the European Union. As on the previous occasions, opinions polls suggest that the result hangs in the balance, promising a period of uncertainty ahead. However, the ramifications of leaving the EU appear to be a lot greater than any of the potential outcomes in the last two polls, meaning that volatility could be far greater this time, especially as the result will be binary.

It is not our intention to take sides. Political affiliations tend to sit badly with investment decisions as judgement can become clouded by emotion. On the basis that a vote to remain within the EU would leave things looking much as they are, our principal aim is to assess the effect that Brexit would have and how we could position portfolios for that eventuality. In the interests of allowing as much space as possible for the investment discussion, we must assume that interested readers will already be well informed on the agreement that the Prime Minister has reached with his European counterparts on reforms.

By its very nature the debate will be emotional and contentious. Unlike in the case of a general election there will not be a chance to try again in five years’ time. This means that both sides will exaggerate the pitfalls and benefits in an effort to win the day. Understandable as this is, it risks confusing the electorate. A study undertaken by Capital Economics of various surveys into the effects of Brexit on the economy showed, over an unspecified forecast horizon, that there was a gap of 22% of Gross Domestic Product (GDP) between the most extreme views. Bearing in mind such uncertainty and the difficulty that even professional investors will have making sense of such information, it seems only natural that market participants will demand a higher risk premium until the outcome becomes clearer. That would suggest some underperformance of UK assets relative to overseas assets, although this would be limited by valuations being “anchored” to some degree to international averages.”

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