“Brexit”/ “Brexin”

As everyone is aware the UK will vote on EU membership on the 23rd June 2016 with the results the following day.

We don’t know the result, no-one does. The bookies are offering 2/5 on “Remain” “Brexin” and 2/1 for “Leave”, “Brexit”.

http://www.oddschecker.com/politics/british-politics/eu-referendum/referendum-on-eu-membership-result

The polling data has varied wildly. The “Remain camp” enjoyed a week long surges in response to President Obama, the “Leave” camp responded well to 2015 UK net migration data from the Office of National Statistics and the Gove speech on Sky News.

The persistently high percentage of “DK” (don’t knows)/ abstentions is a worrying sign, as is the strong evidence of a “generation gap” with younger urban dwellers more EU positive than gentrified older generations. A problem for “Remain” is their younger voters’ turnout is less reliable that the “Leave” camp.

Referendums are binary in nature and they are bad news for markets. As our PM has disclosed, he owns no shares and this makes sense given his preference for referendums. The Scottish referendum saw weeks of uncertainty in the run-up to the vote and about one day worth of rally post vote. The Scottish property market ground to a halt ahead of the vote. The EU referendum is similar, if we vote to “Remain” there will be a one day rally worth maybe 100-150 points largely because with “Remain” nothing changes. If there is a “Leave” there is possibly a 300-400 point downside and significant political uncertainty ahead. Referendums are bad risks.

Which companies are sensitive to the outcomes? We are not recommending these as immediate buys or sells. We are suggesting that these companies over this critical period may be more volatile.

a) “Remain” sensitives ie remaining in the UK will positively impact business.

“Indifferent” ie have a) UK business is small relative to global operations/ no direct business impact – (this is not to say there will be zero short- term impact) b) takeover completion is near c) profits mainly derived in the USA.

“Leave” consist primarily of a) companies that will benefit from a weaker sterling against other currencies because business is mostly based ex-UK or b) Unhedged overseas asset base.

Conclusion

Just to clarify we are saying the above companies either have sensitivity to “Remain” or little or no sensitivity or will benefit from a “Leave” result.

We are also concerned about a very narrow, marginal result (<1% difference) that would pressure the government to hold another referendum at a later stage in this Parliament.

It is an old adage that markets “climb a wall of worry” – we have had investor concerns over the risks related to “Brexit” for over six months. People rightly yearn for a UK when elected governments made the major decisions rather than bouncing them back to the electorate. Maybe there will be a referendum over the Heathrow airport extensions?

By mid-July the EU vote will be “water under the bridge” and investors will have found other issues to focus on such as the path for higher US interest rates and the US Presidential Election in November 2016.

Maybe the real issue is the slowdown in global GDP and the impact of the apparent backfiring of central bank asset purchase programmes (let’s leave that for another day)!