The investing implications of British-Stay or Brexit

Global Chief Investment Strategist Richard Turnill explains what the outcome of the Brexit vote could mean for investors, with the help of his chart of the week.

The outcome of the June 23 UK referendum on whether to remain in the European Union could have far-reaching market implications in the near term. This week’s chart helps illustrate why.

Betting markets imply a roughly 27 percent chance of a British-exit (or Brexit), but momentum has been building toward a leave vote, as evident in the chart below.

cotw-6-6-16

Other indicators suggest a higher probability of a Brexit and a much more uncertain outcome. Traditional polls point to a near 50/50 race, and comments on Twitter are tilted toward a Brexit, our analysis shows.

So, what would be the investing implications of a Brexit? U.K. and other European assets would likely bear the brunt of a leave vote. The chart above suggests the British pound could drop significantly in the event of a Brexit. We would also expect to see U.K. equities (especially domestically exposed small- and mid-caps) decline under a Brexit scenario.

In addition, a leave vote would likely shock global markets. We believe risk assets — including stocks and credit — would suffer in the resulting risk-off environment, as concerns about political instability and a reversing globalization trend would lead to higher risk premiums. Peripheral European assets and the global financials and materials equity sectors would be especially exposed, according to our stress-test analysis. Political risk could also rise amid uncertainty over the succession to British Prime Minister David Cameron. Safe-haven investments would benefit, we believe.

What if the U.K. votes to stay? We see risk assets rallying, safe-haven assets suffering, the pound getting a boost and market attention turning to the upcoming U.S. presidential election. The key for the next few weeks: Caution. We believe now is a good time to dial down equity and credit risk, and U.K. investors may want to put in place hedges against a potential Brexit outcome. Read more market insights in my Weekly Commentary.

Richard Turnill is BlackRock’s global chief investment strategist. He is a regular contributor to The Blog.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of June 2016 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

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