If you Googled “top UK searches last week” you’d find Brexit, or Brexit related material were running Prince Harry’s latest squeeze (Ellie Goulding so say the Belfast Telegraph) and Maria Sharapova’s drug use hard for most searched for item. 
Whichever way the vote goes on 23rd June, it’s clear that the In/Out Referendum has gripped the nation’s interest: with £32 million staked on Betfair – about 10 times as much as staked on last week’s England v Wales game
We study the polls, financial markets and the betting markets for direction. All say something slightly different and the best we can say is that it’ll be close.
Downside risks in the event of an “Out” vote likely outweigh any gains in the event of “Remain” and we have positioned portfolios to reflect this. Thankfully, the pendulum has swung both ways in the last few months allowing us to 1) book profits and build protection, and 2) observe a dress rehearsal for how asset markets may behave post-referendum.
It’s this second point that most piques our interest, with a particular mind to the currency, bond and equity markets.
What’s with the Google search?
The flurry of activity last week was largely to do with people registering to vote, with the website crashing under a crescendo of activity following ITV’s Cameron/Farage debate.
Online registration is deemed to be associated with younger voters who are more likely to vote “In” (by a margin of 70 per cent). Demographically, it’s the older, more established voters that are thought to be in favour of the “Out” vote.
It follows that such heightened googling was taken positively by the bookies in the face of recent polls which have shown a preference for an “Out” vote.
What about the impact on currency?
The pound has been a good barometer for Brexit risk as the chart below will attest to. This dress rehearsal, combined with spiking insurance costs indicates the pound would suffer heavily in the event of a Brexit.
Sterling and Brexit possibility based on betting odds in 2016
Source: BlackRock Investment Institute, Bank of England, Predictt, Predicwise & Pivit
It’s no coincidence that the pound touched a near 30-year low (1.39) versus the US Dollar (which itself has been weak this year) at the back end of February when Boris boarded the “Out” bandwagon - implied insurance costs suggest an 8 per cent swing in the month post-23rd June.
How might bonds and UK government bonds react?
We believe that were the UK to vote to leave the EU we’d see gilts rally. As a hedge against this risk, we’ve upped our exposure to the asset class.
With a yield of 1.11 per cent on the 10-year bond (and bobbing around all-time lows), it’s hard to argue that gilts are anything other than outright expensive. However, were the “Out” vote to carry we could well see the Bank of England cutting rates to stimulate a recovery.
10-yr UK gilt yields in 2016
Source: FE Analytics
Interestingly, bond market implied odds of a UK rate cut this year are now over 50 per cent. They were nigh on zero at the beginning of the year.
The magnitude of any rally would likely be small, given we’ve already seen a 9 per cent plus shift up in gilts this year – they’ve been one of the star performers as global government bond yields have sunk to their lowest levels in 500 years of recorded history.
How might equity markets react?
Equity markets already have a lot on their plate without Brexit; lofty valuations, stuttering business cycles and waning sentiment to name but a few.
That said, an “Out” vote would create the sort of uncertainty which equity markets hate and one would expect this to be most acute in UK domestic and European stocks. Stay in, and one would expect a relief rally in the mid-cap, consumer stocks which have blighted most active managers so far this year.
What do the polls and the bookies say?
Telephone polls have been very much in favour of “remain” throughout the campaign with a 10 per cent preference (or thereabouts) for staying in.
Online polls, on the other hand, have been very much more divided, with the bookies strongly in favour of an “In” vote winning out. Interestingly, the bookies odds have shifted markedly over the last week and are now much more closely aligned to the polls. “Remain” is being priced with a 60 per cent chance having been up around “70 per cent” for most of the lead-up.
What do we say?
We think it’ll be a very narrow victory for “remain”, with the margins much closer to those predicted by the polls than the bookies.
A good turnout is key and online registration suggests it will be just that. Unlike the punters with their 32 million quid chanced on a 60 per cent return should the “In” vote carry, we’ve taken a more cautious approach. We’ve used the currency weakness to take profits in equities and trim large overseas currency exposure.
We’ve bought in and ridden the anticipatory gilt rally and also built up cash reserves – ready to deploy for whatever greets us on June 24th.
Rory McPherson is head of investment strategy at Psigma Investment Management. All the views expressed above are his own and shouldn’t be taken as investment advice.