Although the referendum on Britain leaving the EU is just over three months away, the FTSE 100 continues to deliver improved performance. In fact, after reaching its lowest price level since 2012, the UK’s major index has soared by 8% in around a month. As such, investors don’t appear to be all that worried about the potential for a new era for Britain outside of the EU.
Of course, this could be because investors believe that the British public will ultimately vote to stay in the EU. Yet although various polls have had the ‘remain’ side ahead in recent months, the reality is that polls can sometimes be horribly wrong – and investors should know this. For example, in the General Election last year the polls predicted a very close result until the one that really mattered, the exit poll, put the Conservatives well ahead. Something similar could happen this time even though lessons should have been learned by the pollsters.
Most investors believe leaving the EU would cause short-term uncertainty for the British economy. The ‘divorce’ could be prolonged and possibly bitter, with the terms of trade unknown and the economic impact in the short term impossible to accurately predict, simply because it would be an unprecedented event. As such, it seems likely that the FTSE 100 would fall in the aftermath of a ‘leave’ vote, but by how much is anyone’s guess.
Interest rates
One potential impact of Britain leaving could be higher interest rates. The currency markets have already shown they’re somewhat nervous regarding the prospect of a Brexit, with sterling having weakened dramatically against the US dollar recently. This trend could continue on a Brexit and with a weak currency likely to stimulate he economy, the need for interest rates at historic lows may be somewhat reduced.
While this could in a sense be good news for the UK economy, the reality is that UK businesses, individuals and the government are still heavily indebted. Certainly, the UK banking system is now much stronger than it was even just a few years ago, but an interest rate shock could hurt house prices and economic activity within the UK over the short-to-medium term. Therefore, it seems somewhat likely that in the short run at least, a Brexit would be bad news for investors who aren’t looking to buy shares, but could prove to be good news for those who have cash in the bank and are looking to buy stocks.
That’s because in the long run the British economy would survive a Brexit and, moreover, would be very likely to return to full health. It has endured far more difficult challenges than an exit from the EU and has always come back to deliver growth and an improved standard of living for its citizens. As such, a Brexit could provide an opportunity to take advantage of fear among investors. In other words, it could be a chance to capitalise on what could prove to be discounted asset prices as an uncertain short-term future begins to be priced into the value of the FTSE 100.
So, while in the long run a Brexit may prove to be something of a ‘bump in the road’ for investors, it also provides a chance to buy low and potentially sell high a few years down the line.
