What will Brexit mean for your portfolio?

Almost three quarters (72%) of AJ Bell Youinvest customers who completed our recent online ‘Brexit’ survey are concerned about the impact the result of the EU referendum might have on their investments.

A greater proportion of investors (39%) are more concerned about the impact a Brexit might have on their portfolio than those who are concerned about a vote to remain (8%). Two in five investors have made or are planning to make changes to their portfolio ahead of the referendum. The largest proportion, 21%, are planning to increase exposure to cash with a further 11% seeking comfort in a higher exposure to gold. 12% are looking to increase their exposure to overseas equities.

With one month to go until the referendum, Russ Mould, Investment Director at AJ Bell, looks at the potential impact the outcome of the referendum could have on these actions by investors:

Cash

Governor Mark Carney has stated he could cut interest rates in the event a vote to leave the EU on 23 June has a marked impact on UK economic activity. This would further reduce the already paltry returns available on cash at a time where investors are increasing their exposure.

However, if the UK were to remain in the EU, the veil of uncertainty would be lifted and this could potentially stimulate economic growth in the UK. This could lead to higher interest rates which would improve returns on cash but the Bank of England will be looking for sustained growth over a period of time for interest rates to move significantly higher. So either way, returns from cash are likely to be modest but equally, no one is going to lose any money.

Equities

A Brexit could cause the pound to slide given the uncertainty caused by the lengthy exit process and subsequent prolonged trade negotiations with individual EU members and other global nations. In this circumstance, holding overseas securities and assets would make sense, either directly or through funds, as their value would rise when translated back into pounds.

In terms of sectors, lessons can be learnt from the devaluation of the pound following Black Wednesday in 1992 and the withdrawal of the pound from the European Exchange Rate Mechanism (ERM).

Financials did well as the Government was able to take interest rates lower, something that is less likely this time, but the prominence of big exporting and dollar-earning sectors like Technology, Aerospace & Defence, Electricals & Electronics and Industrial Metals stands out:

Source: Thomson Reuters Datastream

Using this as a template a leave vote could see investors switch to exporters and big dollar earners in particular. Stocks to watch could include Ashtead, Wolseley and BAE Systems.

On the flip side, a vote to remain in the EU would remove the uncertainty that currently hangs over the UK market so we could see a rally in UK-focused stocks following a stay vote. Real Estate Investment Trusts have sagged in the run-up to the vote amid concerns over whether a Brexit would hit commercial property, especially in London, so real estate stocks could lead any post-Bremain bounce.

Another sector to note would be the banks. The Bank of England has warned it may need to cut interest rates in the event of a Brexit and falling rates could further pressure banks’ net interest margin. A vote to stay in the EU would lessen the chances of a rate cut and ease this additional threat to banks’ earnings power.

Gold

Investors that have already increased exposure to gold will have done very nicely as it is up 18% in 2016. Better still, one exchange-traded fund, UBS Solactive Pure Gold Miners ETF, which tracks the performance of a basket of global gold miners is up by 102% this year - and all five of the ETFs which follow the gold-diggers are up by at least 75%.

If a Brexit were to put further pressure on economic growth and interest rates did fall further leaving gold cheaper to hold than cash, some investors may seek a real asset alternative to central bank-controlled paper money. And that’s where gold could prove to be the right call.

Conversely, if a vote to remain were to boost economic growth due to a more certain outlook and interest rates were to rise, history suggests gold could decline in value. Investors would likely flock to other assets better suited to making the most of that growth – such as equities – while rising rates would also increase the cost of owning gold relative to cash.