UBS: UK EU referendum – one week to go
What is an investor to do ahead of such an uncertain event sure to move markets whatever the outcome? Diversification in such times is a must, but in this instance extra attention should be paid to sterling exposure in assets and liabilities both.17.06.2016 | 10:24 Uhr
One week out, the event on every investor’s mind is the UK referendum. The concerns about its outcome are not only being felt in the various markets – sterling is reacting to every opinion poll – but the potential for the UK public to deliver a surprise has likely been at the front of central bankers’ minds this week as well. Indeed, the US Federal Reserve, the Bank of England (BoE), and the Swiss National Bank explicitly discussed their concerns at recent policy setting meetings.
If the opinion polls are to be believed as we enter the final days of the campaign, the results could literally go either way. So investors are rightly concerned. The confusion is increased by the different forecasts that polls conducted online are offering compared to those done over the telephone. Online polls typically reveal stronger support for the leave campaign, although it should be noted that the share of undecided voters is also higher. Telephone polls have up until recently shown the opposite, although this is starting to change. The late surge in support for leaving the EU has come as a surprise, but as yet it is far from clear that a victory is assured. Unfortunately,we aren’t going to know if the polls are reliable or fallible until after the official result is declared, bywhich time markets will have already reacted.
Beyond this, it may be prudent for investors to think about specific positioning.
Should the UK vote to leave the EU, the only certainty for the markets will be more uncertainty. History tells us that investors tend not to reward greater uncertainty, so we would expect the initial reaction to be negative for the pound and UK equities. We see potential for the FTSE 100, with its large international exposure, to outperform the domestically focused FTSE 250. Negative sentiment in the banking sector could spread across the continent, in our view, and hit those markets with a large exposure to it, such as Italy and Spain. Gilts are likely to outperform under a leave scenario, as questions about the economy and the path of interest rates come into question.