DIY Investor Magazine
/
March 2016
10
UNRELIABLE POLLS
Pollsters have been having a hard time of it recently,
with the results of the Scottish Referendum and the
2015 UK General Election confounding the predictions.
For what they’re worth, the EU referendum polls
currently vary widely depending on whether polled by
phone (a consistently clear majority in favour of leaving)
or online (equally consistent in favour of remaining).
As a reference point, the February 14th poll of polls
indicated 49% in favour of remaining, 41% in favour of
leaving and 10% undecided (source: National Centre of
Social Research).
Polls of business leaders, on the other hand, tend to
be more consistently in favour of remaining. When
asked to consider what their preference would be
from a business perspective (rather than their own
private views) 62% of the UK’s FTSE350 Index finance
directors were in favour of staying, only 6% for leaving
and the rest undecided.2
POTENTIAL OUTCOMES – HOW MIGHT MARKETS
REACT?
Regardless of the rights and wrongs of staying or
leaving, it’s just a fact that markets dislike uncertainty.
If there is an increased perception of economic and
investment risk to the UK there would be three likely
near-term reactions in my view: 1) Sterling would
probably weaken; 2) regardless what happens to official
interest rates, money markets would probably seek a
higher rate of return to take account of the additional
perceived risk so it is likely that the cost of borrowing
for business could rise; 3) similarly, the yield of UK
government bonds could rise and prices fall.
Longer term, markets will get a better feel for whether
the risk (and the duration of that risk) to the UK
economy is something really to worry about or not
and will adjust accordingly. It’s worth pointing out that
while the “we’re all doomed” fraternity tend to hog the
FROM AN INVESTMENT POINT OF VIEW, AT THIS STAGE
THERE ARE SIMPLY TOO MANY UNKNOWNS TO ARRIVE
AT A FIXED VIEW ABOUT BREXIT.
headlines, it is perfectly possible to illustrate a set of
scenarios in which the longer term economic outlook
for the UK is better outside the constraints of the EU.
Remember too that Brexit is a political debate every
bit as much as an economic one. David Cameron in
particular is spending significant personal political
capital in this process. If the vote is to leave, it could
potentially render his position untenable and force a
Conservative Party leadership election. The Scottish
National Party have also made it clear that were the
vote in Scotland to be overwhelmingly in favour of
remaining in the European Union, even if the UK vote as
a whole were to leave, they would seek a new Scottish
independence referendum of their own.
On the other hand, if the UK remains a part of the EU,
the most likely reaction in my view is that equity, bond
and currency markets would breathe a sigh of relief
and return to addressing other more pressing problems
such as weak global commodity and oil prices, the
slowing rate of global growth, concerns about China
etc.
From an investment point of view, at this stage there
are simply too many unknowns to arrive at a fixed view
about Brexit. The polls are unreliable and unhelpful,
the result is not a foregone conclusion either way
and if we vote to leave, we’re being told little of what
then happens. Against that background it is difficult
to put forward an investment strategy purely centred
on Brexit. What investors should do is follow the time-
tested strategies of building diversified portfolios of
high quality assets and focus on long-term returns. It
goes without saying that investors need to be vigilant
and mindful of potential short-term volatility which might
arise in the lead up to the referendum and its aftermath,
but they should not be paralysed by it.
Sources
1 UK-EU Economic Relations, House of Commons Library, January 2016
2 Deloitte, January 2016
Important information
This commentary is for informational purposes only and is not investment advice. The views expressed are
those of the author at the time of writing and are not necessarily those of Jupiter as a whole and may change
in the future. Every effort is made to ensure the accuracy of the information but no assurance or warranties
are given. Issued by Jupiter Asset Management Limited which is authorised and regulated by the Financial
Conduct Authority.
FATCA
