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How Brexit might affect investments

The Investec Research Team assess what affect a Leave vote could potentially have on investments.

Topic: Economy

Unlike the results of a General Election, the outcome of the EU Referendum will be permanent. So what could happen to investments in the event of a Leave vote?

In this article we’re taking a politically impartial view. Political affiliations sit badly with investment decisions as judgement can become clouded by emotion. Our principle aim is to assess what affect it could potentially have on investments.

What would happen to Sterling in the event of Brexit?

We don’t make currency forecasts, because we believe they don’t tend to fluctuate significantly enough to impact on our long-term investment approach. However, based on their experience of the 2008 financial crisis, a number of high profile investment banks have suggested that the pound might lose around 10-15% of its current value in the aftermath of Brexit.

While this would be a big fall, we don’t believe that it would constitute a full-blown crisis, as the UK is solvent and the fiscal position is improving. Having said that, the pound could be expected to trade weakly for some time. It is also possible that some UK-based investors could seek to reduce their risks by taking investments out of the country.

On a more positive note, a weaker pound would naturally make our exports more attractive, potentially bolstering profits for those companies trading overseas.

How would UK businesses cope with Brexit?

UK companies that deal mainly with UK-based customers and suppliers would probably suffer more than exporters. They are likely to come under pressure as concern grows about weak demand and higher input costs arise from the weaker pound. There might also be a wage-driven margin squeeze if access to low-cost workforce from Europe was cut off.

The banking sector appears to have the most to lose, as Brexit threatens to cut off access to its lucrative European markets. This threat is being taken seriously too, with HSBC already having said that it might relocate 1,000 staff abroad in the event of a Leave vote.

Some sectors might well benefit from a weaker pound. Travel and leisure companies would expect to see an uplift, not just from overseas tourists attracted by a more favourable exchange rate, but also from more Britons deciding to save money by holidaying in the UK.

In summary, we’re headed into unknown territory

It isn’t possible to come to any firm conclusions at the moment, though we might feel more relaxed about the risks if the UK economy was booming and the world was experiencing strong demand.

There are signs of some bias emerging in the polls, with internet poll responders, who are a self-selecting group, tending to favour a Leave vote, while those being randomly polled by telephone seem more in favour of a Remain vote.

Regardless of this, the Investec team’s stance at the moment is to continue to focus on high quality investments in a sensibly diversified portfolio, with changes only where we see unbalanced risk.

The information in this article is for private circulation and is believed to be correct but cannot be guaranteed. Opinions, interpretations and conclusions represent our judgement as of this date and are subject to change. The information contained in this article does not constitute a personal recommendation and the investment or investment services referred to may not be suitable for all investors; therefore we strongly recommend you consult your Professional Adviser before taking any action. Copyright: Investec Click & Invest Limited. Reproduction prohibited without permission.

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