Equities 

Don’t rule out a summer sell-off

This article is part of
EU Referendum – May 2016

Don’t rule out a summer sell-off

With less than a month until the UK goes to the polls to vote on whether to remain in or leave the EU, it seems sterling has taken the brunt of negative sentiment.

Could UK equities get jittery as the referendum looms? Or will the FTSE 100 index, which comprises mainly international companies, help shield equity investors?

Mark Barnett, head of UK equities at Invesco Perpetual, points out: “The UK stockmarket is a heavily overseas market – more than two-thirds of the FTSE All-Share index constituents’ revenues come from outside of the UK – and hence near-term volatility apart, the impact there should largely be limited to the effect of weak sterling.”

David Page, senior economist at Axa Investment Managers, acknowledges the FTSE 100 index is considered a “safe haven”, given it is so resource-centric and many of its revenues are non-EU generated. Instead, he focuses on the FTSE 250 index and its over or underperformance versus the S&P 500 benchmark.

“The FTSE 250 has outperformed the S&P 500 during periods when Brexit appeared less likely, when there was a strong lead for Remain in the polls. But as we’ve seen that lead dwindle over most of this year, we’ve seen the FTSE 250 underperform relative to the S&P 500,” Mr Page says.

According to a survey of 2,000 investors by The Share Centre, 58 per cent believe a vote to exit the EU would have a negative impact on their investments. It seems the uncertainty in general is playing on investors’ minds, as the poll also reveals half of respondents are concerned about the impact the referendum will have on the UK stockmarket, regardless of the outcome.

KEY FIGURES

40%

Of the 1,000 investors polled by TD Direct Investing, 40 per cent are feeling less confident about their investments as a result of the uncertainty ahead of the EU referendum

36%

Of those polled, 36 per cent are waiting to see what happens before making any investment decisions

53%

Some 53% of respondents are treating the event as ‘business as usual’ in terms of their investment confidence

Source: TD Direct Investing

Ian Forrest, investment research analyst at The Share Centre, thinks some equities will benefit from a Brexit. He explains: “It is likely that a vote to leave would cause sterling to weaken, which would benefit companies that generate most of their sales outside the UK, but report in sterling. Rio Tinto and Royal Dutch Shell are good examples of this.

“However, this effect could be relatively short-lived, as the results of the negotiations become clearer. Furthermore, they may be offset by reduced economic growth in the UK and the impact on companies with most of their earnings in this country.”

Marino Valensise, head of Barings’ multi-asset group, notes: “In terms of equities, a Brexit would require an approach different to the one many investors have taken in the last period. When sterling is strong and the economy works, small and mid-sized caps tend to perform well, given that import costs remain low and domestic demand is strong.