Brexit – in the run up to the referendum

Brexit – what does it mean to your investments?

Nobody is confident they know what the result of the EU referendum is likely to be on 23rd June and we won’t find out until the day after polling closes. This lack of predictability is causing uncertainty in markets and generating confusing headlines from bookies and pollsters, as well as markets.

What the money says

How about this stat from bookmaker William Hill a couple of months ago: 71% of EU Referendum Bets are for Leave (15th March 2016).

At the time 71% of punters were betting on a ‘Leave’ vote, which seems a fairly clear indication of voting intentions. But over half the money, 52%, was backing ‘Remain’. Which figure more accurately reflects the likelihood of Brexit? Do these figures highlight that a lot of people, many more than anticipated, may vote to leave the EU? Or that the majority will vote to remain?

What the bookies say

The Queen announced the Referendum on 27th May last year and, as we get closer to the day of the vote,betting on the result has intensified. To quote William Hill again, in 24 hours at the beginning of June the odds for Britain to leave the EU had risen from 4/1 (a 20% chance of leaving) to 2/1 (a 33% chance of leaving).

William Hill EU referendum odds as of 12th June 2016: ‘Remain’ 2/5 favourite (a 71% chance of winning the bet) ‘Leave’ 2/1 second favourite (a 33% chance of winning the bet)

What the pollsters say

It doesn’t get any clearer if you look at what the pollsters are saying. If you go to Britain’s largest independent social research website pollster, ‘what UK thinks’, you will see that on the 14 March their poll of polls indicated that 52% would vote to ‘Remain’ and 48% would vote to ‘Leave’ the EU. As of 10th June their poll of polls says 50% will vote ‘Remain’ and 50% ‘Leave’. So it’s neck and neck. Does any of this give a clear prediction? We’ll only find out on the 24th.

What the markets say

Interestingly currency, bond and equity markets have all reacted differently since the referendum was announced on 27th May 2015 by the Queen to 10th June:

Sterling is down 10.5% against the euro and has weakened against most major currencies. Currency is the asset class that has had the most attention and has been the most sensitive to news.

Bonds up 8.5%: UK Government bonds have performed surprisingly well, partly on the back of a flight to safety as investors seek less risky assets but also as a result of the reduced likelihood of interest rate rises.

Equities down 7.1%: This is using the UK FTSE All-Share as a measure – it includes small, mid and large-cap shares; small-cap shares have shown the greatest sensitivity to headline grabbing news from both the pollsters and the bookies.

Interest rates unmoved: The date of a potential rise in UK interest rates has been pushed further into the distance. This is not all EU related; it is also influenced by the delay in US rate rises and slowing global growth.

UK Property up 12.9%: 50% of investment into UK property is reported to be from overseas and increasing demand has driven up prices.

The source of index data was from Morningstar and sterling data from Bloomberg.

What’s this all about and what’s it got to do with Architas?

Well not so long ago, during the Scottish Referendum, a very similar scenario arose with bookies and pollsters seemingly at odds with each other and also with the stats. On the eve of the Scottish independence vote, the bookies overwhelmingly backed a no vote, while the pollsters were less certain. And the bookies were right. So would we be wise to accept the bookies’ view again?

Many experts believe that the polls were wildly inaccurate during the whole Scottish referendum campaign. This is despite much investigation and number crunching on behalf of the pollsters, who hold focus groups, vet candidates and generally claim to profile and determine the tail risks of deciding what time to email questions to the public, what is the significance of the colour of top a pollster wears in the north compared to the south, and what hair products tend to be used by people who tell the truth in polls, etc., etc. So why did the pollsters get it wrong?

Cutting through the noise

Some say that discussing your voting intentions is one of the last taboo subjects, although that’s sometimes hard to believe given the volume of noise generated by some of the more ’politically engaged’ characters out there. Bookies cut through that noise, and make a simple, commercial calculation based on where the bets are being placed rather than what people say. The bookies aren’t often wrong, so when the odds are moving towards a leave vote that makes us sit up and pay attention but, as Leicester fans will testify, they’re not always right either. So we need to be prepared for all outcomes.

Be prepared

Whatever the outcome is, Architas aims to be prepared. We have a research team of over 20 investment professionals working in the UK office alone and we don’t follow conventional wisdom just because it’s popular. We have upwards of 1,000 fund manager meetings every year and meetings with strategists and economists because we believe that it’s vitally important to get a diverse set of views and opinions to keep up to date with what’s going on.

We listen to as much news and opinion as we can and draw our own conclusions and it’s clear to us that whichever way the vote goes there is likely to be a significant amount of volatility in the markets. With this in mind we have been preparing for Brexit from as far out as December when we started positioning for movements in sterling assets. It’s important to note that while we are taking a lot of factors into consideration, the most important is still long-term asset allocation linked to client suitability. The outcome of Brexit is one important factor in this, but far from the only one that will impact investors over the next 15 years.

The investment part

Anticipating more difficult markets ahead we began reducing sterling holdings in Q4 last year. As the opinion polls have narrowed, we have continued to reduce our exposure to equities and raised our foreign currency holdings.

The Bank of England (BoE) Governor Carney has stated that the BoE would not take a position on whether Britain should stay in the 28-member bloc but in January he stated that there was ‘the possibility of a risk premium being attached to UK assets‘ which added to the riskiness of the situation. However, the BoE is prepared for either eventuality and has drawn up an action plan ready for a vote to leave if necessary.

Considering this wide-ranging uncertainty, we at Architas believe it wise to set a strategic view we are happy to stick with and be ready for tactical opportunities. In practical terms, it is our opinion that investors could benefit from putting their money in a fund with a flexible mandate that can respond quickly to rapidly changing circumstances. In short, stay invested but be prepared for volatility.

The value of investments can fall as well as rise and is not guaranteed – investors could get back less than invested. Past investment performance is not a guide to future performance.


Source: Architas