EU Referendum and investors

The date for the EU Referendum has been set for 23 June. So what impact will it have on the markets?

Short-term, in the four months run-up to the event, there is likely to be some volatility in the UK markets. As we saw in the run up to last year’s Scottish referendum, markets do not like uncertainty, and there was significantly higher volatility on the markets as a result. After the Scottish vote, a relief rally followed.

So after the referendum, a ‘Bremain’ vote is likely to see a return to business as usual on the markets. According to most pollsters, this still seems the most likely option, although it may be a close run thing.

It should be borne in mind of course that we are part of the global marketplace, and the possibility of a Brexit is only one of many factors concerning investors and markets right now. These include China's economy, the effect on emerging markets, as well as the current negative interest rate policy of the ECB and Bank of Japan, plus the problems surrounding Europe's banking system.

However, after 23 June, the impact of a Brexit vote could be a different matter. There would certainly be a fairly long period of uncertainty, as a new trade agreement is thrashed out, amongst other things, so we could expect a good deal more volatility.

Obviously in the long-term, equities and markets are dependent on corporate earnings, so it would depend on the impact of a Brexit on GDP. The think tank Open Europe believes that the UK would be better off by 1.6% of GDP pa by 2030, assuming widespread deregulation and favourable trade deals, whereas the LSE’s Centre for Economic Performance believes Brexit would see a fall in GDP of between 2.2% and 9.5% pa. Economists at JP Morgan predict that Brexit could see GDP reduce by 0.3% off the GDP of the eurozone over 18 months, while sterling could fall by up to 10%.

With economists and experts putting forward such different scenarios, and with no real precedent for a country leaving the EU (Greenland excepted), the outcome post-Brexit would inevitably see market volatility. On the other hand, voters have tended to vote for the status quo in referendums.

As the debate unfolds over the next four months, investors should certainly keep a watchful eye on events, whilst we at Kellands will be monitoring developments.

For more information, or for investment planning advice, contact Kellands.

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