Britain is well and truly in the countdown to voting in the EU referendum, with little over a week to go until it decides whether to stay in or leave on June 23rd. And with the latest poll from What UK Thinks: EU Poll of Polls taken on 13th June showing that 49% vote to remain and 51% vote to leave, the battle remains close.
How is Brexit impacting investors and their portfolios?
From a finance and trade perspective the arguments are fairly even. Arguments from those who want to leave include UK companies being freed from EU regulation, and that Britain would be able to subsequently negotiate its own deals with other countries. Data also suggests that trade with the EU would also continue as Britain imports more than it exports.
The remain camp say that leaving would slow economic growth and it would have to comply with EU rules to retain access to the single market anyway.
ETF Strategy spoke to several industry experts who take a look at how investors view the impending Brexit vote and how portfolios are being adjusted accordingly.
Rebecca Hampson, associate editor at ETF Strategy talked with:
James Butterfill, Head of Research and Investment Strategy at ETF Securities
Viktor Nossek, Director of Research at WisdomTree Europe
Marlene Hassine, Head of ETF Research at Lyxor Asset Management
1.) What are investors talking about in relation to the Brexit vote?
James Butterfill, Head of Research and Investment Strategy at ETF Securities.
James Butterfill, Head of Research and Investment Strategy at ETF Securities, said: The main conversations are related to the divergence between the online polling and telephone polling, the bookies and regional/demographic biases in the polling data. Most see that when the pollsters provide a “don’t know” response most of those individuals have historically voted for the status quo, when polls are adjusted for this the gap is much wider than the polls say. There is a belief that bookies tend to be a closer representation of the public’s views and that pollsters often have regional and demographic biases that were revealed in the election last year.
Most investors believe that the greatest short-term impact (of fear of Brexit rather than Brexit itself) will be on sterling and consequently we have seen a big rise in short positions in our short-GBP ETFs. As we believe that Brexit is unlikely we see this as a buying opportunity for long-GBP.
Viktor Nossek, Head of Research at WisdomTree (Europe).
Viktor Nossek, Director of Research at WisdomTree Europe, said: The question we are being asked a lot is ‘to what extent can risk assets drop off?’ Should investors protect long positions in equities with short positions as hedges. Or do they do nothing and wait until the vote is case?
Political or economic markets hate uncertainty, but it’s now a question of the extent of uncertainty. We can look at Grexit last year for how risky assets were treated. In the 30-day lead up to the vote UK and Eurozone equities dropped by 8-9% (that is FTSE 100 stocks and EUROSTOXX 50). This referendum was an economic one, so very different, but is the closest proxy we have.
What we are seeing in the 30-day run up to June 23rd is contrary to this. While the polls are in a dead heat the spread betting market and bookies are seeing an overwhelming chance that Britain will remain and markets have tilted towards this stance.
2.) How are portfolios being adapted in light of the vote?
JB: We have not heard of clients actively adapting their portfolios but have been planning from a risk perspective, part of this has been to purchase short-GBP as a form of hedging. Many clients were already underweight UK equities due to continued malaise in the commodity and financial sectors as the FTSE 100 comprises almost 55% of these sectors alone.
Marlene Hassine, Head of ETF Research at Lyxor Asset Management
Marlene Hassine, Head of ETF Research at Lyxor Asset Management: There is a clear story in terms of fund flows this year. Since the beginning of 2016, European Equity ETFs have suffered outflows of €7.8bn. Instead investors have focused on US equities (€2bn), Emerging Markets equities (€2.3bn) and Investment Grade Corporate Bonds (€7.1bn). Flows toward UK equities have posted a record high at €0.5bn so far in 2015. They have however turned negative in April and were flat in May.
3.) What are the biggest concerns?
JB: Passporting of their [investor] funds throughout Europe after a potential Brexit and the risk of it creating wider financial contagion. At the moment surveys have highlighted that Brexit is their top concern, above that of a China hard landing or a Greek default.
VN: British people could vote with their pockets, not emotions. If all you see is economic uncertainty and no clear economic model, then there is only uncertainty looming for the UK. Not knowing is likely to be enough for those undecided to prefer the status quo. The UK has been through several years of austerity and in the last two years we have started to see real wages for workers rise. This implies a level of economic stability and visibility. There is no economic incentive for people to adopt a different approach.
However, closer to June 23rd it is likely that the price rise in risk assets will dissipate and we will see increased volatility. Investors may then reduce their position in risky assets.
4.) What ETFs are available?
JB: We have seen a big rise in short positions in our short-GBP ETFs. As we believe that Brexit is unlikely we see this as a buying opportunity for long-GBP.
ETF Securities has seen a rise in short positions in its short-GBP ETFs
Neither short FTSE nor short gilts have seen any dramatic flows, suggesting they are not being used to play the Brexit risk.
VN: ETFs can position investors for either scenario. The irony is that UK equity market (large caps) are the least likely to be negatively impacted if Brexit occurs and sterling weakens, because it helps with the export tariff [they trade globally]. The FTSE 100 will also likely not be impacted significantly.
The ETFs that play on defensive equities with high dividend payers, will gain traction post Brexit.
If Britain stays then ETFs in favour will likely have broad exposure to small cap equities to the EU: this is a play on strong trade in the EU.
In the current status quo we would expect a share price rally. In the prelude to Brexit, ETFs tracking safe haven assets (UK Gilts and gold) may see some inflows as investors look for protection.
MH: There has been strong usage of Minimum Volatility Smart Beta strategies as investors are increasingly seeking to reduce risk in their equity exposures.
Available ETFs include:
iShares MSCI UK Large Cap UCITS ETF (LSE: CUKL) – TER 0.48%. It has returned 3.55% YTD, according to data from Bloomberg.
Lyxor UCITS ETF FTSE 100 (LSE: L100): TER 0.15%. It has returned 2.92% YTD, according to data from Bloomberg.
Lyxor FTSE Europe Minimum Variance UCITS ETF (LSE: MVEX): TER of 0.2%. It has returned 6.60% YTD, according to data from Bloomberg.
Viktor Nossek comments on what could happen post-EU Referendum