EQ Investors says it has positioned portfolios to protect investors from the potential risks surrounding a leave vote at the EU Referendum on 23 June. It does not currently believe that the vote to leave the EU is a probable outcome. But, if it does happen, the company believes the market implications could be quite negative in the short to medium term at least due to the heightened uncertainty about the position of the UK in Europe and on the global political stage.
EQ view:
Sterling
Outlook – We expect weakness and an increase in volatility, due mainly to weakening foreign direct investment. Some of this has already occurred, but there is risk of further weakness.
EQ Action – Over the last several months we have taken steps to diversify our currency exposure. We hope this will reduce portfolio downside risk in the case of rising Brexit concerns.
Equities
Outlook – We expect some weakness in UK equities to reflect added uncertainty around our relationship with the EU. Financial services and manufacturers with European trade links are likely to be some of the worst hit sectors.
EQ Action – We are underweight in UK equities relative to our peers and do not plan to increase this allocation at least until Brexit concerns are alleviated.
Fixed income
Outlook – Credit rating agencies have expressed concern about Brexit, with Moody’s saying “a decision to leave the EU would be credit negative for the UK economy”. This could increase the yield on UK government bonds. We expect UK corporate bonds would also be subject to higher yields in the short term. Over the longer term, there is an uncertain benefit to be gained by larger companies from their foreign earnings that could eventually outweigh any losses.
EQ Action – We remain underweight in UK fixed income.
Commercial property
Outlook – The UK commercial property market is very international and some of this investment could fall away in the event of a Brexit. We are already seeing large outflows from property funds which could be an ominous sign of things to come.
EQ Action – We are reducing our exposure to UK commercial property to neutral from overweight.
IFA Magazine’s Brexit coverage series is supported by Old Mutual Global Investors. Watch out for their special report on the impact of the Brexit result on UK equities, available on the 28th of June.
