Investment Portfolios and the EU Membership Referendum

by Alexander Beard, on Apr 26, 2016 5:48:20 AM

DSC_7239Good news - the impossible task of predicting the future just got easier! Usually there are many different potential outcomes to events making it hard to say exactly what will happen in the future.  With the EU Membership Referendum there’s only two possible outcomes: LEAVE or REMAIN.  So you have a 50/50 chance of calling it right.  The value of your investments could move in one of two ways in response to the result of the vote:  UP or DOWN.   Is this a 50/50 call too?  - arguably not.  Different assets will respond in different ways to the big EU decision and will be bolstered or undermined by currency movements, and it is of course not the only event taking place this year.

I would like to inject a sense of perspective. It is undeniably an important vote, vital to the UK and also of international significance.  But the future of the world does not depend on our referendum.  The world is facing some headwinds at the moment, with a slowing economic recovery, falling demand for commodities, currency devaluations and the ever present threat of terrorism and geopolitical conflict.  It is also a time of political change in the US – which will take another six months to unfold.  On the global stage, there are issues that will have a greater bearing on the shape of investment portfolios than the UK’s place in Europe.  So whilst we may have two possible outcomes on the EU vote, how it will impact on the other matters currently in play is much harder to work out.

Investment markets are all about prediction. How economies are performing can sometimes be very different to how markets behave.  Investors buy shares with the intention of benefitting from an increase in value, so the demand for shares can be a predictor of future economic performance. Polls ahead of the referendum will give us a good idea of how things are likely to turn out, and markets are likely to move with the polls, rather than waiting to see the result itself.  Polls are usually reliable but are occasionally not (as we saw in the general election).

Investment markets are also about sentiment. Investors get carried away with both rising values and falling values, sometimes acting with a crowd mentality.   The recent history of EU stock markets has been frustrating.  Efforts to stimulate economic recovery by the European Central Bank, by pumping out money and slashing interest rates, have been hindered by political events.  The referendum could be added to the recent list of disturbances in Greece and the Ukraine, not to mention the migration crisis. Combine the referendum with market sentiment and we have a flammable cocktail that could ignite if the polls are wrong, sending markets tumbling.

I don’t think I will get away without stating a position here. I emphasise that these are my views rather than those of Alexander Beard, although I would like to congratulate the company for encouraging open discussion.

In my view, the economic arguments of leave or remain are equivalent, but the biggest issue is one of change. Change can be for the better or worse, and either way, it comes at a cost.  For example, if you are marrying or divorcing, dealing with a birth or a death, it is likely to be an expensive business and take time to adjust.  Take this to the national level and we could be in for a bumpy ride if the leave campaign prevails.  If this happens against the predictions of the polls then I would expect to see markets fall sharply, which would hurt investment portfolios in the short term.  Whilst the impact of this outcome on investments could be severe, it seems unlikely.  The most likely outcome in my view, is a vote to remain, in which case it is more ‘business as usual’ and world events will determine the performance of investments.

With regard to the Alexander Beard portfolios, we continue to hold relatively large levels of defensive assets such as government bonds and index linked bonds, just in case markets fall sharply.  The rest of the portfolios are overweight in the EU and underweight in the US and UK, and minimal exposure to emerging markets and Asia.  If the EU can get past its list of political hindrances the ECB’s stimulus may finally bite.  We quite like commercial property, though, as neutral ground that seems more likely to chug along irrespective of the referendum decision.  Only with hindsight will we know if this was the right balance. So please, if investing, take a longer term view, absolute minimum of 5-7 years, because the only thing that we know for certain is that values will fall at times.

Andrew Moore
Investment Director and Partner

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