Another View on the EU Referendum

It has been difficult to avoid the rather noisy and not always informative debate around the EU referendum. But as the month of June starts, there remains considerable uncertainty about how it will finish and we cannot ignore what is undoubtedly a key decision for the country.

Whatever your views, how can we prepare for the potential outcomes and what should really concern us?

What do we know?

Firstly, the polls are close. The bookmakers have a better track record and at the time of writing you can get 2/7 odds on for Britain remaining. A vote to leave looks unlikely in their opinion. But you could get 5,000/1 on Leicester winning the Premiership.

We know that the majority of leading economists consider that the UK will be worse off if it leaves than it would be if it chose to stay. This is in contrast to the debate about joining the Euro where there were a wider range of outcomes from the models and opinions differed extensively amongst top economists.

But perhaps most importantly we know that it is causing uncertainty and any vote to leave will cause further uncertainty.

In politics, following an Out vote, it is difficult to see how there cannot be a change at the top after David Cameron has so whole heartedly embraced the ‘In’ campaign. No mainstream party has a manifesto for an Out scenario and there is no consistent view on what it might look like. This will inevitably leave a vacuum in politics at least in the short term. And this lack of leadership and direction will come at a time when there is a 2 year window to re-negotiate terms of trades and work out which EU driven laws are to remain and which to go. That will cause an uncertain environment for businesses.

We know that there is nothing that spooks markets as much as uncertainty.

So an out vote is a possibility – but not a probability – but a possibility that will have such major short term consequences that it is worth thinking about how to prepare for that eventuality.

So what should we do?

In this sense it is helpful to differentiate between the short term consequences and a longer term perspective.

Short term, there will be lots of volatility. The general consensus in the market is that the biggest impact will be on sterling with likely swings around the release of each opinion poll up until the vote and a significant immediate devaluation in the event of an Out vote – at least against the US dollar if not the Euro.

Some individuals may be interested in taking short term bets around that volatility. This type of short term trading is not consistent with our overall philosophy of long term investment but for those prepared to take the risk, it may offer some opportunities for profit. Or you could just look out opportunistically for good rates to buy currency for known future expenditure.

Equity markets, including the FTSE 100, have to date not been significantly impacted and are taking their guidance from the wider outlook for global growth and corporate earnings. With the US presidential elections later in the year, uncertainty will continue throughout 2016.

It is these longer term economic cycles which continue to shape our overall recommendations on investment. We continue to plan for a central scenario of sluggish global economic growth and a relatively benign outlook for inflation. Portfolios are diversified with international exposure in markets and currencies, seeking to access those areas where we see the relatively greater growth opportunities over the next economic cycle.

The uncertainty triggered by an Out vote may well tip the UK into recession and a fall in the value of sterling will increase the risk of inflation from the higher cost of imports and given the UK trade deficit. The outlook for UK property may deteriorate. What impact this will have on the outlook for the wider global economy is unlikely to be immediately obvious given there are so many different factors impinging on the current global outlook. If the possibility of an Out vote becomes a reality, then it is likely that our longer term outlook for different assets classes will alter and we will be recommending changes.

That outlook is driven by the main challenges facing the world – economically, socially and politically. June 24th will give us certainty over the outcome of the referendum but which ever way the vote goes, many of those challenges remain.