Opinion  

Post-referendum certainty should calm markets

Taha Lokhandwala

Taha Lokhandwala

We enter the week of one of the most important referendums in recent UK history – and haven’t the markets shown it.

There is very little I can write that can add to the political debate. Noise has come from both sides with wild accusations and claims. From a political perspective, the past nine weeks have been an abomination.

From an investment perspective, and after a period of relative calm, markets have begun showing their irrationality. As polls and odds narrowed, the outcome is less clear. Markets and investors must now factor in protection – and cash and Gilts are one way to do that, as we have seen.

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Many would suggest global fund manager allocations to cash – which Bank of America Merrill Lynch says are at the highest level since 2001 – show investors are beginning to believe the vote will be to leave. That’s not necessarily the case: all it shows is investors beginning to factor in the possibility a lot more.

What it does show are three schools of thought: investors unwilling to suffer a potential sharp drawdown in risk assets should the UK vote to leave the EU; managers waiting to capitalise on an upswing if the vote is to remain; or a combination of the two.

But this is an act of the market itself and explains the recent volatility. The downward trend seen in the last fortnight has been because of this rush to safety.

The volatility we will no doubt see on Friday, regardless of the outcome, will be because others are joining the shift away from risk assets or investors are trying to be the first back into risk following some certainty.

Speaking to a multi-asset fund manager last week, I asked whether the holding in cash they had initiated did an injustice to long-term investing. If the volatility seen in the market is a reaction to their own actions, then doesn’t it become a self-fulfilling prophecy?

The manager, quite rightly, argued their responsibility was to protect client assets, and cash was the most sensible way in which to do this given the market and the potential of a leave vote. They also said it allowed the possibility of moving straight back in and riding the upturn.

I, like everyone else, cannot predict what will happen this week in the markets, nor on Thursday. However, I know the markets will likely be volatile – challenged by the previous sentence.

But the main thing to remember is that on the other side lies certainty. The volatility seen has not been because of an expected vote to leave, nor one to remain. Many will think it is one potential outcome of the vote that is driving markets; however, it is just not knowing that is doing the damage.