EquitiesMay 31 2016

Don’t rule out a summer sell-off

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Don’t rule out a summer sell-off

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.

“If sterling were to weaken this would cause the opposite, with the need to focus away from domestically driven companies, while focusing on UK-listed multinational firms – in other words, favouring FTSE 100 companies with a material portion of the revenues generated abroad.”

This poses the question of whether investors should reposition themselves in equities before the referendum. Adrian Lowcock, head of investing at Axa Wealth, advises against allocating to one result ahead of another “as that could damage portfolio values quickly”.

He says: “The key is to have some capital protection in place in the event of a sell-off over the summer, and have cash ready to allocate to those sectors and companies that offer attractive value.”

But many are preparing for a volatile summer as managers and investors shift their portfolios on the outcome of the vote, or put to work cash they have been sitting on in the months leading up to the referendum.

Ellie Duncan is deputy features editor at Investment Adviser