Mention of a potential Brexit from Europe started to roll out at the end of 2014 in the run-up to the 2015 general election, but for many it was seen as an unlikely scenario, highlighted only because it was included in the Conservative manifesto.
The surprise majority win for the Conservative party last year, combined with the speed at which the government entered into renegotiations of terms for the UK and then set a referendum date, has propelled the vote to the top of most investors’ key concerns.
Figures from the May Bank of America Merrill Lynch Global fund manager survey show that while most respondents think a Brexit is more of a risk than a reality, with 71 per cent describing it as either unlikely or not at all likely, 27 per cent of those surveyed consider it the biggest ‘tail risk’, up from 19 per cent in April.
Angel Gurria, secretary general of the OECD, comments on the responsibilities of UK voters:
|“The question posed in the referendum, ‘Should the UK remain a member of the EU or leave the EU?’ is a taxing one. Taxing in the sense that its consequences are complex and permanent, not only for the UK but also for the rest of the EU and even beyond. So the responsibility borne by British voters on June 23 is very serious indeed. It will be an act of intergenerational responsibility.”|
The effect of the forthcoming vote is already being felt in markets, with sterling falling roughly 6 per cent against the euro since the start of this year to May 17 and the FTSE 100 index oscillating between lows of 5,536 in February to a high of 6,410 in April, data from FE Analytics shows.
More recently, sterling and the FTSE have bounced on signs that the polls are turning decisively in favour of a Remain vote. But the impact of the vote is already apparent. A slowdown in UK GDP growth in the first quarter to 0.4 per cent, including a contraction in production, manufacturing and construction, suggests some investors and businesses are adopting a wait-and-see approach before making a decision on where to place their money.
With key figures ranging from US president Barack Obama to the Bank of England’s Mark Carney and Christine Lagarde of the IMF weighing in on the debate on the perils of leaving the EU and Leave campaigners such as Nigel Farage suggesting there could be a second vote if the result is very close, it is no wonder investors are struggling to choose where to place their money.
Percentage in the May BofA Merrill Lynch Global Fund Manager Survey that consider Brexit the biggest investment ‘tail risk’.
Figures from the Investment Association show net retail inflows in March moved back into positive territory at £379m, compared with net outflows of £399m in February. But this is still less than half the amount flowing into investment funds in March 2015, when net retail inflows reached £965m.
In addition, equity funds seemed to bear the brunt of investor uncertainty in March, with net retail outflows of £459m, while outflows from UK equity funds reached £430m, suggesting the referendum debate is continuing to weigh on investor minds.
With less than a month to the vote, and potentially years of continued disruption ahead in the event of a decision to leave, the only thing that can be reasonably expected is more volatility and uncertainty.
For some investors this might be a cause for concern, but for those willing to take advantage of the disruption there could be some interesting investment opportunities available.
Nyree Stewart is features editor at Investment Adviser