How could the EU referendum affect markets?

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As the Brexit campaign pendulum continues to swing in both directions, market speculation and economic volatility continue to feature on the agendas of the UK’s finance houses.

With some sources citing that a ‘Leave’ vote could pose serious economic implications, with financial services having more to lose immediately after a European Union exit than most other sectors of the economy, markets have begun to react across the globe.

Both the sterling and euro have recovered this week as support for the ‘Leave’ campaign appeared to ease whilst Monday’s surge in equities saw Wall Street recover losses from last week.

One of the key factors to consider during the turbulence caused by Brexit fears is that the City’s competitive advantage is founded on more than just unrestricted access to the single market and there are plenty of other advantages to investing in the UK. Any downturn following an exit from the EU is likely to be short-lived and, once our new trading terms are renegotiated, foreign investment would probably recoup any losses and stability will return.

In support of this, strategists at Deutsche Bank and JP Morgan have backed staying “overweight” on UK equities as they predict British stocks will outperform the broader European market if Britain voted to leave. This is partly due an expected fall in the value of sterling alongside the market’s defensive sector structure.

They wrote:

“The pound is a natural hedge for UK stocks, with 72 percent of sales derived from abroad. We would hedge out the foreign exchange risk, but believe that UK equities will hold out relatively better than continental ones in the event of the UK leaving.”

Furthermore, those with any doubts about the upcoming Brexit risk can put their minds at rest by investing in bonds to protect their shares. Bonds are often overlooked as an investment channel as many investors believe they are in a bubble – this is a myth. The government bond market in particular differs in a number of ways, namely that supply is effectively unlimited as more can always be printed. The stability and income that comes from holding bonds in a balanced portfolio make them an extremely attractive asset class in any market, let alone in the more turbulent times we are experiencing now.

Bonds also have some important differences to shares – when an investor buys a corporate bond they are guaranteed a regular income from interest payments and there is asset maturity date upon which the money is returned – which make them a powerful addition to any portfolio. What’s more, unlike equities, bonds are excellent at preserving capital making then an ideal choice for those approaching retirement who are seeking a fixed income that can be taken either once, twice or four times a year.

Whilst the general consensus is that The City may feel some negative impact in the short term post Brexit, it is thought that any anomalies will eventually even out.

If you would like to discuss any part of your investment portfolio, please contact your Finura Partners advisor.

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