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Brexit: The investment impact PDF Print E-mail
Tuesday, 08 March 2016

Commenting on the financial market implications in the lead up to the EU referendum and thereafter, Michael Stanes, Investment Director at Heartwood Investment Management said: “The European Union (EU) is clearly an important trading partner, accounting for nearly half of all UK exports. However, the EU’s share of UK trade has fallen over the past decade as other economies have seen accelerated growth. Ultimately, the Brexit question comes down to bargaining power and whether the UK has the ability to act alone in the global economy.

“Given the seemingly close fought nature of this campaign, a higher risk premium is likely to build across UK financial markets between now and the referendum on June 23rd, with sterling most likely to absorb major price moves, which to some extent it already has done.

“We would expect a vote to stay in the EU to be seen as business as usual and a net positive for UK financial markets, especially given concerns around funding the UK’s sizeable current account deficit.

“The consequences of the UK leaving the EU are, of course, more uncertain and would lead to short-term negative sentiment across UK assets. Sterling is likely to be most vulnerable on concerns of capital flight risk needed to fund the deficit, although its recent weakness has gone some way to reflect these risks.

“As investors digest the potential consequences of Brexit, we would expect UK gilts to benefit from a safe-haven bid and policy support from the Bank of England. Large-cap UK equities should weather the storm better than small-and mid-caps, which would, in the short term, be pressured by the resultant economic uncertainty.

“We expect subdued activity in property until the referendum, but overseas interest should pick up after the vote as investors take advantage of a potential fall in the value of sterling. This would be irrespective of whether the UK votes to stay or leave, as we see no significant, lasting damage to the UK economy.

“The financial repercussions of the UK’s departure from the EU should be contained from the European perspective, although expect short-term headline noise questioning the validity of the EU project. German assets would probably be considered a safe-haven for euro-based investors, as equity and bond markets in periphery countries come under pressure.

“While we are cognisant of the risks of the UK leaving the EU, we are not re- positioning our portfolios in anticipation of such an outcome. Other global factors remain more significant drivers of performance – China rebalancing, Federal Reserve tightening and commodity prices. We are, however, maintaining our long-standing underweight exposure to sterling and UK equities, as well as a short duration position in UK gilts. In UK property, we would, in any case, expect to be reducing our exposure as the cycle matures.”

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