Brexit: busting the myths part five
On Tuesday, a surge of half a million applications caused the government’s voter registration website to crash: 525,000 submissions on deadline day. This shows that we’re either a nation of complete procrastinators or the sheer political force of this referendum has prompted typically indifferent voters to actually take an interest in politics. Either way, it’s clear the Brexit debate has stirred up significant political intrigue across the country, which can’t be a bad thing.
Since last week’s blog, the voter margins have continued to narrow with bookies cutting the odds of a ‘remain’ vote, but still backing a comfortable win for the status quo.
Is the remain campaign panicked by this? You bet. Some hastily hatched press conferences and public pronouncements certainly suggest this.
Justice Secretary and leave proponent Michael Gove’s performance on Sky News last week seems to have galvanised the Brexiteers. So with less than two weeks to go, how are markets reacting to these latest developments?
The FTSE 100 seems fairly complacent, hardly moving point to point over the last 10 days. In contrast, the gilt market has rallied strongly, with the 10-year yielding 1.26% at the time of writing. Just last month, the yield was more than 1.47%; in April it was approaching 1.7%!
Interest rate rise expectations have gone out to 2020! Is this due to a higher probability of a leave win and the resultant monetary easing by the Bank of England? I have been selling gilts this week, taking profits and building up my cash reserves. It feels right to me to have plenty of cash available given the binary outcome of this vote.
The cable rate has been oscillating between 1.43 and 1.47 over the past week, and really seems to be struggling to price in the risk of a Brexit. There is every chance sterling could fall 10% to roughly 1.25 on 24 June. Equally, it could rebound to 1.51+ in the event of a remain vote. That is a huge swing to try and navigate. Sterling would fall against all other major currencies, although the drop against the euro might be more muted, due to a high probability of contagion risk for the eurozone.
So how do we try to take advantage of a remain win, while trying to mitigate a leave win?
As I’ve said, I’ve been raising cash, but I’ve also added to my UK mid and small-cap weighting, as they will probably bounce in the event of a remain win. That is not to say they’re cheap, but sentiment and perception are very important drivers of short-term market reactions to macro events.
Overall, I’m not reducing equities. Instead, I’m maintaining a bias to non-UK markets and revenues. In the event of a Brexit vote, the FTSE 100 will be sold off in the short-term panic by broad-brush ETF outflows. This, despite 80% of the blue chip index’s revenues coming from outside the UK.
This will give me the chance to use my significant cash reserves to buy excellent companies at bargain prices.
If we remain, my cash will be redirected to other opportunities in fixed income and alternative investments. Basically, it doesn’t pay to be too brave in these situations - better to have a foot in both camps.
My vote, however, will only be for one!
While this is the last of the Brexit series, given the closeness of the vote, I will post a final blog next week trying to sum up the debate that could come to determine our relationship with Europe for a generation or more.