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Stephens: Have cash ready to invest on Friday post the EU referendum

21 June 2016

Guy Stephens, managing director at Rowan Dartington Signature, argues that no matter what the outcome of Thursday’s EU referendum, investors are better off having cash ready to deploy back into the market on Friday.

By Guy Stephens,

Rowan Dartington Signature

This time next week the result of the Brexit vote will be known and investors can focus on other fundamentals.

The last few months have been like a market where time stood still.  Will we, won't we?  Advantages and disadvantages, claims and counterclaims.  Unfortunately, the campaign has not cast the politicians and our version of democracy in the best light.

Both sides are manipulating the facts and seemingly insulting the intelligence of the electorate.  The battle is now on for the undecided voter.  With the polls neck and neck, these individuals will be key and so we would expect the scaremongering to go up a gear, if that is realistically possible.

A vote for the Leave camp is the more radical option whilst a vote for Remain is much more conservative as it is a known quantity. 

With the UK economy growing and with virtually full employment, if you were an undecided voter and in a stable job, why take the risk?  I don't recall us all screaming to get out of the EU prior to this Referendum?

This feature was shown dramatically in Greece where a radical left wing party was elected, not that it changed much when the EU was eventually confronted in Brussels. 

However, crucially people were desperate, with high unemployment, failing basic infrastructure and even food shortages.  Anything had to be better than the status quo and so a leap into the unknown and a guaranteed confrontation with the EU seemed worth a go. 

What was there to lose? Will the relatively comfortable and affluent undecided voters in the UK really have the motivation and conviction to overcome the potential risks of a leap into the dark which may shatter that lifestyle?

Whatever the outcome, there are market opportunities ahead.  If we vote to Remain, then Sterling will rally along with the UK equity markets in a sign of relief. 

Performance of sterling in 2016

 

Source: FE Analytics

There is also a fair degree of sectoral repricing to be done as economic developments have been put on hold over the last few months.

If we vote to leave, which is the more unexpected and complex outcome, we will probably see a knee-jerk market sell-off.  This provides a longer term buying opportunity as the fear of an economic slowdown, or recession, become reflected in the markets. It will almost inevitably get overdone so don't panic on Friday.

Stand back and get ready to invest if we vote to leave.

Those of a certain age may recall the doom that ensued when we spectacularly crashed out of the European Exchange Rate Mechanism. It appeared like we had descended into a form of banana republic with several changes in interest rates in one day - clearly the authorities were in panic.

Performance of sterling in 1992

 

Source: FE Analytics

Sterling devalued and it took a couple of days for investors to realise that this was great news for the UK economy which had been struggling with an overvalued currency.

If Sterling falls by the forecast of up to 10 per cent on a successful leave vote, this will be a boost to exporters so there may be a very good opportunity to buy selected equities amid the turmoil. 

Considered investments at such moments can invariably be some of the most profitable.

So, holding some cash ahead of Friday, ready to be deployed, is probably about the best hedge an investor can make. 

The vast majority of businesses will not be affected in any meaningful way in the long term. Life will carry on and we won't ever know what the outcome would have been had we voted the other way.

Hold your breath, prepare your strategy and be brave if you have the opportunity.

 

Guy Stephens is managing director at Rowan Dartington Signature. All the views expressed above are his own and shouldn’t be taken as investment advice.

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