How to trade a Brexit and a Remain

The chorus of voices warning of potential turbulence in financial markets if Britain leaves the EU has grown louder over the past 24 hours. The Federal Reserve, the Bank of Japan and the Swiss National Bank have all joined in, writes Katie Martin.

Here is a selection of how investors are preparing for the historic June 23 vote, which has driven yields on UK government bonds to record lows, weakened the pound and reverberated across financial markets.

Stephen Mitchell, fund management director at Jupiter Asset Management, says: “Very simply . . .  We have refrained from adding to our UK weight for a year. If we get a dislocation in markets it’s often the only time to buy high-quality names at a discount, which is what we would look to do on Brexit, especially if sterling falls. Little to do on Remain.”

Meanwhile, Paul McNamara, investment director in emerging market debt at asset manager GAM, argues: “Keep it simple, stupid. Short sterling vs either dollars or havens [Swiss franc and yen]. Buy gilts and/or Bunds. We walk in on the 24th and certainly Carney and possibly Draghi open the liquidity floodgates.”

For emerging markets, he says sell the Mexican peso and South African rand.

At Aberdeen Asset Management, Luke Hickmore says a decision to leave the EU will throw up plenty of buying opportunities for the right assets.

He says: “Make sure you have plenty of liquidity — there will be a lot of opportunities to pick up great long-term holdings as the volatility increases in the next week. Preference for UK banks over European, for example — the former have little or no long-term default risks, whereas the Italians in particular will come under pressure.”

If, on the other hand, you’re looking for safe havens, Mr Hickmore contends, “buy US Treasuries — is this the only safe haven left? Flight to quality either way — if we leave, people will worry about Europe let alone the UK, and the Swiss curve is very negative.”

James Athey, who also manages funds at Aberdeen, says he is short euros against the dollar because “in a Brexit outcome I think the focus will quickly shift to the problems this would create for the eurozone and further stimulus and even an existential crisis will likely result in a weaker euro”.

He adds: “In a ‘Bremain scenario’ the primary focus may well be a relief risk-rally allowing the Fed to become more hawkish pushing the dollar stronger across the board.”

Picking up the idea that a British vote to leave will cast a shadow over the whole of the EU, Nick Gartside of JPMorgan Asset Management would steer clear of the debt of the so-called periphery countries in the eurozone.

“Reduce peripheral and central European government bonds that could be at risk of a sell-off, while favouring large economies with independent monetary policies [such as the US].” He also cautions that prices for UK corporate bonds are not fully reflecting the risk of a Brexit.

“A strong rebound in credit spreads over the past three months across a sample of investment-grade issuers with similar maturity bonds in both the sterling and euro markets suggests that Brexit premiums have now been priced out of the market . . . Trim credit exposures in both sterling and euro issuers that lack sufficient Brexit premiums.”

Mr Gartside adds that longer-dated bonds will do well.

“Duration will be a bond investor’s friend in a Brexit scenario. In JPM Global Bond Opportunities fund we’ve taken duration to a record high of five years in our portfolio, a reflection of our conviction that global yields will stay low.”