Exchange traded product provider WisdomTree Europe has suggested investors position themselves defensively by hedging long equity positions, while also looking to UK Gilts, German Bunds and gold, in its asset allocation strategy released ahead of Britain’s referendum with the European Union on 23 June 2016.
WisdomTree Europe predicts market volatility to increase during the build up to the In/Out referendum scheduled for 23 June 2016.
The statement, which covers various asset classes including equities, fixed income, currencies and commodities, predicts that markets will become increasingly volatile before the referendum as speculation of a potential exit from the Union heightens political uncertainty.
Investors may wish to consider investing in ETPs that provide leveraged exposure to the inverse performance of broad UK and European equity markets. The Boost FTSE 100 3x Short Daily ETP (3UKS) provides triple the daily inverse return of the FTSE 100 Index. The Boost FTSE 100 2x Short Daily ETP (2UKS) and the Boost FTSE 100 1x Short Daily ETP (SUK1) are also available, providing double the daily inverse return and the unleveraged daily inverse return on the FTSE 100 Index respectively. The Boost Euro Stoxx 50 3x Short Daily ETP (3EUS), the Boost ShortDAX 3x Daily ETP (3DES) and the Boost Euro Stoxx Banks 3x Short Daily ETP (3BAS) provide triple the daily inverse return of the Euro Stoxx 50, the German DAX, and the Euro Stoxx Banks indices.
WisdomTree also suggests safe-haven assets may outperform in this volatile environment and investors may wish to allocate a portion of assets to tracking the performance of UK Gilts, German Bunds or gold. The Boost Gilts 10Y 3x Leverage Daily ETP (3GIL) and the Boost Gilts 10Y 5x Leverage Daily ETP (5GIL) provide triple and five times the daily performance of 10-year Gilts respectively, while the Boost Bund 10Y 3x Leverage Daily ETP (3BUL) and the Boost Bund 10Y 5x Leverage Daily ETP (5BUL) provide triple and five times the daily performance of 10-year Bunds respectively. Long exposure and long leveraged exposure to the gold price may be obtained from the Boost Gold Daily ETP (GLD), and the Boost Gold 2x Leverage Daily ETP (2GOL) and Boost Gold 3x Leverage Daily ETP (3GOL) respectively.
From a currency perspective, WisdomTree thinks the pound and euro may be sold off in the run up to the referendum. If so, investors could profit from an investment in the Boost Long USD Short EUR 5x Daily ETP (5USE) which provides investors with five times the daily return of an appreciation of the US dollar against the euro.
Following the results of the referendum, if the decision to remain in the EU is made, WisdomTree believes this would restore market confidence and European equities may be boosted through the re-affirmation of quality growth opportunities. Similarly, safe-haven assets may experience a paring back of gains made in the lead up to the vote.
The WisdomTree Europe SmallCap Dividend Fund (DFE) provides access to dividend-paying small cap European companies. Triple daily inverse exposure to Gilts and Bunds may be obtained through the Boost Gilts 10Y 3x Short Daily ETP (3GIS) and the Boost Bunds 10Y 3x Short Daily ETP (3BUS) respectively, while inverse and inverse leveraged exposure to the daily performance of the gold price is available through the Boost Gold Short Daily ETP (1GOS), and the Boost Gold 2x Short Daily ETP (2GOS) and the Boost Gold 3x Short Daily ETP (3GOS) respectively. Furthermore, investors wishing to bet on a recovery of the euro against the dollar may consider the Boost Short USD Long EUR 5x Daily ETP (5EUS).
If the decision to abandon membership of the EU is made, WisdomTree predicts elevated political and economic risks for both the UK and the EU. Structural weakness may put both the pound and the euro at further risk. WisdomTree suggests high dividend UK equities as well as currency-hedged European equities may perform well. Investors may wish to consider the WisdomTree UK Equity Income UCITS ETF (WUKD) and the WisdomTree Europe Hedged Equity Fund (HEDJ).
Gold’s safe-haven appeal may be reinforced, adding further gains to the yellow metal while WisdomTree proposes going bearish on Gilts and bullish on Bunds as investors re-allocate their risk-off investments away from Sterling-denominations.