Now that the surprise of a Conservative General Election majority win has died down, investors are focusing on the major political event of the current parliament: the EU referendum. Although it had seemed to be a rather unlikely event, since a Tory majority victory was not predicted by any of the pollsters, the reality is that the UK could feasibly leave the EU within the next two years.
Clearly, that would represent a major change and, both politically and economically, could prove to be the biggest single event in a generation. As such, investors should be aware of its potential impact on their portfolios and investments.
Significant Uncertainty
If the recent election has taught us anything about polls, it is that they remain far from accurate. As such, it is likely that the market will not rely upon them when contemplating the possibility of the UK leaving the EU. This means that, between now and the referendum, there is likely to be a period of significant uncertainty because even if the polls say that the UK will vote to remain in the EU, the lack of trust in their results means that investors may begin to price in a discount to intrinsic values. As such, it appears likely that the FTSE 100’s performance will be held back, to at least some degree, over the next two years.
Limited Investment
Of course, whether you think the possibility of the UK leaving the EU is a good idea or not is highly subjective. For investors and businesses, though, it would represent a major change and, as history tells us, neither is keen on known unknowns. As such, it would be of little surprise for businesses to hold back on some capital expenditure and investment over the next two years, and for investors to withhold investing their capital as they have been doing in recent years. Both of these happenings are likely to not only hold back the performance of the FTSE 100, but also cause the UK economy to underperform relative to recent years.
Looking Ahead
Clearly, the FTSE 100 could rise over the next two years. That’s especially likely since the majority of companies count the UK as a relatively small part of their sales and, as such, it could reasonably be argued that factors such as the performance of the US and Chinese economies, the oil price and other commodity prices matter much more for the future of the FTSE 100. However, investor sentiment is likely to be less positive than it would have otherwise been without the prospect of an EU referendum.
And, should the UK leave the EU then, in the short term at least, share price falls seem to be a likely outcome as change and upheaval reduce confidence among investors and businesses. As such, the next two years could prove to be a golden opportunity to buy high quality companies at discounted prices, with increased volatility in the short run unlikely to be a significant problem for long term investors seeking to buy low and sell high.
