The UK's referendum on whether to stay in or leave the European Union is now less than a month away. Here are some comments from wealth managers.

As wealth managers prepare for the 23 June UK referendum on a possible exit, or “Brexit”, from the European Union, we expect a torrent of commentary about how investors could or should prepare for any outcomes. At the time of writing opinion polls suggest that the case for the UK remaining in the EU will prevail, but as readers will know, opinion polls can be unreliable. As mentioned earlier this year, the weight of opinion in the wealth management sector appears to favour no exit for the UK, but it is not a rock-solid consensus. Concerns about the EU’s perceived lack of democratic accountability and legitimacy, its bureaucratic ways and “mission creep”, may outweigh worries about a “leap in the dark” that Brexit appears to represent. (To see some previous commentaries on the issue, see here, here and here.)

Guy Monson, CIO of Sarasin & Partners
A convincing win for the “remain” camp would likely trigger a sharp rise in sterling – this might ultimately prove challenging for FTSE100, but UK banks, and smaller domestically focused companies, should rally strongly. The impact of a “leave” vote could be more widespread and problematic than many expect, with a polarised response from the UK equity market and a variety of global casualties.

Our current strategy assumes that “Project Fear” ultimately results in a victory for the “remain” vote – this argues for retaining sterling exposure close to benchmark or mildly overweight, under-weighting gilts and favouring “quality” bank equity or credit exposure. For a UK investor holding global equities, especially with a quality or income tilt, both outcomes are surprisingly well balanced - a “remain” vote should see global equities rally, while weaker sterling should cushion much of the likely decline in a “leave” victory.

Unlike previous shocks in the recent history of the European Union, the impending UK referendum is happening in a country that is not a member of the euro. This is important for investors because rather than markets simply guessing at the likelihood and extent of an exit and revaluation (as in the last two Greek crises), our free floating pound provides a "real time" barometer of voter sentiment. This makes investment strategies built around the markets – rather than the bookies – much easier to implement, especially where so much of the UK equity market is underpinned by global rather than domestic earnings.

In the event of a “leave” vote, sterling would retrace recent gains, and could decline by another 10 per cent or more if the pound’s behaviour after leaving the Exchange Rate Mechanism (Black Wednesday) in 1992 is an (albeit imperfect) guide. It is probable that the government would need to implement an emergency budget, and the likely next move in rates would be downwards.

Note that the euro too could be a major casualty, as worries over the credibility of Europe “ex UK” and the likelihood of referendums in other member states grows. With sterling and the euro weak, this would imply a renewed and unwelcome surge in the dollar, potentially weakening commodity prices and derailing a nascent recovery in the emerging world. Put simply, the global impact of a “leave” vote could be more challenging than many expect.

Indeed, this would lead to a particularly polarised response from the UK equity market, with domestic banking and retail falling sharply, while staples (tobacco and beverages) and pharmaceuticals should benefit – at least in relative terms – from weaker sterling as well as their naturally defensive earnings bases. Smaller companies would be particularly vulnerable to trade uncertainty, while consumers may well lift their precautionary savings, impacting the high street. Sterling would once again be a buffer, meaning that it is quite possible that the FTSE 100 could outperform (at least in local currency terms) other European markets.

Julian Jessop, global chief economist, Capital Economics
The trends in the opinion polls and in bookmakers’ odds suggest that a UK vote to leave the EU would now be a major surprise. Given this, the initial uncertainty caused by Brexit would probably boost the prices of safe havens, including government bonds and gold, at the expense of equities, industrial commodities and emerging markets. Nonetheless, there are also good reasons to believe that Brexit would not result in the deep and prolonged global shock that many fear.

Over the weekend, G7 finance ministers added their voices to the many warnings that Brexit could be a seismic shock to the world economy, as well as having what the IMF has described as “a negative and substantial effect” on the UK itself. The market turmoil that might result is also an important part of the UK Treasury’s assessment of the short-term economic costs.

Five points are worth reiterating now. First, a vote to leave would not result in the UK leaving the EU immediately. The relevant treaty legislation allows for a period of negotiation of up to two years (which could be extended if the parties agree). This is crucial, because it means that the existing institutional arrangements (governing trade and so on) would remain in place for some time, and there would be opportunities to resolve at least some of the uncertainties surrounding the UK’s departure before exit actually took place. 

Second, the rhetoric is likely to change once the result of the referendum is known. At the moment, policymakers and others favouring “remain” have a strong incentive to talk up the risks of Brexit in order to influence the electorate. However, after a vote for Brexit, the emphasis would presumably shift towards minimising the economic fallout and reassuring investors. This might include additional policy support – including additional monetary easing or a further delay to interest rate hikes.

Third, these two points suggest that the market swings following a vote for Brexit may be less damaging and more short-lived than many fear. With little changing immediately and a long process of renegotiation only just beginning, the global focus could quickly move on to other things. For example, whether the US currency ends the year higher or lower will probably depend far more on the Fed.

Similarly, developments in China will matter far more for emerging markets and for many commodities. And even within UK assets, there could be winners as well as losers. A weaker pound could boost the equities of exporters, while expectations of a longer period of low interest rates should support gilts. 

Fourth, though, long-term uncertainties about the future of the EU may grow. Those overseas who have argued that the UK should remain in the EU have tended to emphasise the risks to the UK itself (even though a few of these risks – such as the redirection of some economic and financial activity to the rest of the EU – might actually boost growth elsewhere in Europe). But in the back of their minds is surely the fear that if the UK made a success of it outside the union, other countries might be emboldened to follow. This may still encourage some EU politicians to take a tough line on the UK. 

What’s more, the exit of the UK could make it easier for remaining countries to take the EU in what others would see as the wrong direction – such as rolling back structural reforms in favour of more populist policies. And while nothing much might change quickly in the economic sphere, some would undoubtedly play up the geopolitical and security risks too (relations with Russia, NATO and so on). 

Fifth, this all makes us wary of drawing too firm conclusions about the impact of Brexit on particular assets – and hence about how the subsequent market moves might affect the wider economy. For example, while we assume that sterling would fall immediately after a vote for Brexit, the outlook thereafter may depend on how the Fed responds (perhaps keeping US interest rates lower for longer) and whether Brexit prompts the eurozone crisis to flare up again. Over time, UK assets (including sterling, gilts and property) could still be seen as a refuge from even bigger problems in the rest of Europe.

Brooks Macdonald
EU membership provides UK-based companies with the ability to "passport" their services throughout Europe. This has led to a high level of financial integration between the UK and other EU member states. It has also helped London become a gateway to Europe for the rest of the world, a fact demonstrated by the high level of global foreign direct investment in the UK financial sector. Because of this, the Brexit referendum poses a particular risk to the UK’s large financial industry.

Some argue that the UK would be able to establish a more favourable regulatory environment outside of the EU, but it is unlikely that the European Securities and Markets Authority (ESMA) would allow UK-based financial companies to operate in Europe without adopting equivalent regulatory structures, such as the Markets in Financial Instrument Directive (MiFiD) II. While preserving the ability to passport services would very likely require regulatory equivalence, it is possible that the added risk accompanying non-EU status would lead to some repatriation of financial activity to both Europe and the world’s other financial centres in any case.

London could clearly no longer be seen as the European financial capital, but that does not mean that it would necessarily stop being the dominant financial centre in Europe. The incumbent position and network effects provided by London’s long history as a financial centre should ensure some insulation from any major exodus of financial activity.