Britain’s historic referendum on EU membership has already moved the markets — sterling, equities and property have all experienced volatility.
Pressure is also building in other sectors, with the attitude of international investors towards risks for the UK economy playing a crucial role. The uncertainty has caused headaches for multinationals and ordinary investors alike.
“It’s like tossing a coin,” Dieter Wemmer, chief financial officer of Allianz, Europe’s largest insurer, said on Wednesday, referring to the neck-and-neck polls for Leave and Remain. “If the outcome is 50/50, it’s a pure bet on which side to prepare for.”
It is a bet, however, that many market participants can neither ignore nor avoid.
Ahead of the June 23 vote, the FT looks at Brexit trades: investment strategies to prepare, and even profit from, a decision to Leave (or Remain).
If Britain votes to leave, a sterling sell-off is a safe bet.
Some analysts think the pound could lose as much as a third of its value against the dollar because of worries that leaving the EU will reduce capital inflows, increase the current account deficit and provoke a recession.
Michael Saunders, a Citigroup economist soon to join the Bank of England’s Monetary Policy Committee, wrote recently that a British exit would probably trigger a 15-20 per cent depreciation against Britain’s main trading partners.
This year has provided a taster of the Brexit effect. In the 12 months to March, the pound lost 11 per cent of its value against the dollar, while the price of hedging against a post-Brexit collapse soared. The currency has since made up a little less than half of that ground while hedging costs have eased.
The week of the referendum is likely to see the pound under pressure, unless the Remain camp is polling strongly.
The consensus view is that sterling will recover if the Remain camp triumphs. But analysts caution that any bounce could be limited because of Britain’s increasingly weak fundamentals.
If Britain votes to leave the EU, sterling would not be the only currency to avoid. The euro and other European currencies would probably come under pressure because of expectations that the UK’s departure would be bad for the rest of the bloc.
That leaves the dollar, emerging market currencies (which have already strengthened this year) and possibly the Swiss franc as the likely beneficiaries of a Leave vote. Roger Blitz
Bank stocks are one of the asset classes most vulnerable to a British exit and the economic downturn that could ensue. Bankers have already warned of foreign investors’ worries over the referendum.
UK banks’ bond spreads, which reflect the cost of their borrowing on the markets, are now 30 basis points wider than at the start of the year, Moody’s Investor Services said last week.
The rating agency also noted that a British exit would have a “moderate impact” on the profitability of commercial lenders such as Barclays, RBS, Lloyds, Santander UK and HSBC as a result of lower credit growth. Banks with a greater emphasis on retail business would be less exposed, since the effects of lower growth would take longer to reach households.
Other parts of UK banks’ funding mix, such as securitisation, could also be affected by Britain voting to leave because at present their regulation depends on EU law.
Investors looking for a Brexit play may opt for the likes of Standard Chartered, which does very little business in the UK, over RBS or Lloyds, which are almost wholly focused on the domestic market. Thomas Hale
Financial groups, retailers and construction companies are just some of the equities that could feel the heat, initially at least, if Britain votes to leave.
It could be a big blow for the City of London’s international activities, depriving UK-based companies of their “passport” to sell products to the rest of the EU.
But investors have been relatively unmoved and generally stocks have not yet been hit by such fears. So insurers, for example, are likely to face pent-up pressure if the Leave campaign triumphs.
Then there is the impact on the economy as a whole. Investment and consumption have already slowed in the run-up to the vote and could be further hit in the immediate aftermath of a decision to leave, with consequences for companies particularly exposed to the UK market.
So far this year, the mid-cap FTSE 250 index and the blue-chip FTSE 100 index have not significantly diverged, even though the former is more deeply rooted in the domestic economy while the latter is more international. In fact, the FTSE 100 could reap some benefits from the expected slump in the pound if Britain leaves, at least in the short term.
The Brexit play may well be to keep clear of the FTSE 250 and to consider shorting financial stocks. Michael Hunter
UK government bonds
Some analysts and investors think that buying gilts, as UK government bonds are known, is a good Brexit trade. So far this year, gilts’ price movements have been less influenced by the looming referendum than by global market trends. But if Britain leaves the EU, the Bank of England could keep interest rates low to cushion the economy from any shock, which in theory would boost gilt prices.
There are still risks. The gilt market is overwhelmingly domestic but the UK government has increasingly looked to foreign investors to buy up debt, since the financial crisis led the country to increase its borrowing sharply.
In the first two months of the year, as uncertainty increased about the UK’s future in the EU, those foreign investors sold more gilts than they bought. While net purchases resumed in March, a Leave vote on June 23 could push overseas investors to abandon gilts once again. Elaine Moore
Some housebuilders say the referendum is already weighing down the British property market as a whole.
Banks and rating agencies such as Credit Suisse and S&P say the market would weaken immediately after a Leave vote, with construction groups exposed to London especially at risk.
Commercial real estate stocks are already under pressure, largely because of investors from outside Europe, sovereign wealth funds and other foreign buyers staying on the sidelines.
One of the Brexit trades has been to target Berkeley Group, the high-end housebuilder. Shares in Berkeley have lost a fifth of their value this year, with a slowdown in homes in the £2m plus bracket. One reason is currency. Nervousness about the outlook for sterling may undermine UK property’s role as a store of value for the global elite.
So while those anticipating a vote to leave will want to keep well away from shares in developers of luxury homes, true believers in Britain’s destiny in the EU might consider buying a London pied-à-terre. Dan McCrum
UK’s EU referendum: full coverage and analysis
View the FT’s comprehensive guide to the vote on whether Britain should stay in Europe, with all the latest news, analysis and commentary from both sides of the debate. See more