As the EU referendum date nears, markets continue to reflect uncertainty over the result.
Investors grow nervous ahead of political watersheds, not least because their stock-in-trade is companies, not governments or electorates; and the EU referendum vote will be the biggest political decision the UK has had to make for decades, with potentially profound implications. Investors could be forgiven for wondering what they should do ahead of the vote.
Recent market responses to referendum and polling news have not been good for nerves. Trading volumes are down as investors, most notably foreign investors, sit on their hands, exacerbating short-term volatility. The value of sterling has swung significantly and this is likely to continue as we near voting day.
The volatility reflects the fact that markets dislike uncertainty, and only the final result has the potential to settle investors. In that respect, it is one positive for markets that the referendum date is only a few weeks away. But there are plenty of other factors influencing markets at the same time - the US presidential election, China’s slowdown, and ongoing debt resolution struggles in the eurozone - and such issues are likely to have greater long-term implications.
“The EU referendum is a political matter and therefore not one on which we take a view,” says Chris Ralph, chief investment officer at St. James’s Place. “Political uncertainty is one of the risks faced by investors, and one which is ultimately out of their control. Without understating the significance of the referendum result, what is vital is that such events don’t discourage investors from committing to long-term plans to enhance and protect their wealth.”
The impact of the result is likely to vary across markets, even within the UK. The FTSE 100 comprises many international companies that generate overseas earnings, in industries such as oil, pharmaceuticals and mining. “The referendum result may well cause ‘short-term noise’ based on sentiment, but is unlikely to impact the fundamentals of these businesses in the long term,” suggests Ralph.
On the other hand, the FTSE 250 is far more representative of the UK economy, so a vote to leave is likely to have greater consequences. In particular, a weaker currency in the event of an exit would support global players but hurt smaller domestic businesses. But Ralph stresses that such generalisations should not form the basis of a portfolio strategy. “An investment manager’s responsibility is to identify the long-term attributes and potential of a company. Good businesses will be able to adapt to a changing environment.”
Keeping it in context
So given the high level of uncertainty, what can investors do to prepare for, or protect themselves against, the referendum result?
“It is understandable that some might consider delaying investing, or switching into cash, on fears that markets will react negatively to the result,” observes Ralph. “The risk of this approach, however, is that investors miss out on a possible ‘relief rally’ in the event of a vote to remain in the EU.”
Investors inclined to attempt to time their entry or exit may indeed have been caught out in the weeks prior to the vote, as markets have gyrated in response to nothing more than the latest opinion poll.
Challenging though it can be, investors should not be tempted to time the market and should avoid allowing short-term uncertainty to get in the way of making long-term investment decisions. What also needs to be remembered is that, against the short-term uncertainty of investing in markets is the certainty of record-low returns on cash. Indeed, the Bank of England has already suggested that interest rates may be cut in the event of an exit vote in order to stimulate growth and investment.
Long-term investors know the value of holding their nerve through periods of volatility, and should anticipate more in the lead up to, and aftermath of, the vote. Such short-term periods of uncertainty are an inevitable feature of equity investing, and history shows that markets do recover.
“In the long run, markets will move on from today’s political uncertainties,” adds Ralph. “Of course, different economies, sectors and companies will respond differently to major political events. Investors who maintain a well-diversified portfolio, which spreads their money across regions and asset classes, and provides different sources of return, are less likely to suffer a major adverse shock, and are more likely to benefit from a positively-greeted referendum outcome.”
An investment with St. James's Place will be directly linked to the performance of the funds selected and the value may therefore fall as well as rise. You may get back less than you invested. An investment placed into equities would not have the security of capital associated with a deposit account with a bank or building society.