Ian Forrest, investment research analyst at The Share Centre, looks at possible effects on the stock market if UK voters choose to leave the EU on 23 June 2016:
As debate intensifies in the run-up to June’s EU referendum, many investors will be pondering what the impact might be on the UK stock market if there is a vote to leave.
According to our recent survey of 2,000 personal investors*, 58% believe a ‘leave’ vote would have a negative impact on their investments, even though a similar proportion, 62%, intend to vote for Brexit in the referendum. Half of personal investors are concerned about the impact the referendum might have on the UK stock market, whatever the outcome in June.
So what impact would a vote to leave have on the stock market? The answer is that it is of course difficult to predict. There will certainly be losers, at least in the short term, but we can’t rule out that there may be winners too.
A vote for Brexit would lead to negotiations with the European Union which, investors should acknowledge, may run for up to two years – and possibly longer, given that it is unprecedented for a country to leave the EU following a referendum. Added to that is the likelihood that the UK government would simultaneously start negotiating terms of trade with a large number of countries around the world to try to minimise any disruption faced by companies that do most of their business outside the EU.
As a major economic power, the UK does have clout in regards to negotiating trade terms. We believe there are big EU companies which will be very keen to maintain their current terms with the UK and not have any impediments put in the way of current trade. Some will indeed be lobbying heavily with their own national governments, as well as with Brussels, to make sure that relationships continue.
It is likely that a vote to leave would cause Sterling to weaken which would benefit companies that generate most of their sales outside the UK, but report in GBP. Rio Tinto and Royal Dutch Shell are good examples of this. However, this effect could be relatively short lived, as the results of the aforementioned negotiations become clearer. Furthermore, they may be offset by a reduced economic growth in the UK and the impact on companies with most of their earnings in this country.
Freedom from the requirement to adhere to EU rules could mean that some UK financial sector companies may also benefit, including wealth managers such as St James’ Place.
However, others in the financial sector believe they would be significantly impacted by Brexit. Among them is HSBC, whose Chief Executive Stuart Gulliver has been very vocal about the fact that 1,000 investment bankers could be moved to Paris if Britain did indeed vote to leave. Investors should acknowledge that there is a possibility that multinational groups like HSBC might lose their passporting rights to carry out business across the EU, leading to higher regulatory and administration costs. Having only recently decided to keep its headquarters in the UK, a Brexit vote might cause it to reopen that issue.
Another longer term impact might result if border controls are tightened. That would have an impact on sectors such as retailing and construction.
It is always going to be difficult to predict who the winners and losers will be. However, what we can predict is that uncertainty regarding Britain’s future in Europe will contribute to continued volatility in the interim period.
*A survey of The Share Centre’s customers was distributed online on Saturday 6 February. There were 2,200 responses.