If the UK votes to leave the European Union (EU) on 23 June there could be substantial market volatility and serious economic consequences, so with just a few weeks until the vote should you be taking steps now to bolster your portfolio against whatever ensues - before it kicks in?
Yes, believes Nigel Green, chief executive officer and founder of financial advice firm deVere Group. He says investors should be 'Brexit-proofing' their portfolios against the possibility of a leave vote, which could see a fall in the value of UK assets.
He says: "We have seen that the referendum and the consequent campaigning has already created considerable uncertainty, with many companies in the private sector shelving or postponing investment due to the forthcoming vote. This uncertainty and volatility can be expected to intensify if Britain decides to leaves the EU."
In particular, equities, government bonds (gilts) and sterling would all be negatively affected by the economic and political uncertainty that would follow, he says.
He suggests investors seek protection from these potential adverse effects by increasing their exposure to overseas stocks, bonds and in some cases property.
Mr Green is not alone in his support for 'Brexit-proofing' investments. A recent survey by The Share Centre found 25 per cent of its individual savings account (Isa) investors were seeking less risk in their portfolios, with almost half of these pointing to the EU referendum as the reason.
The EU debate is certainly fuelling UK economic weakness and investor anxiety says Jason Hollands, managing director at Tilney Bestinvest. But, he says, investors should take 'doomsday predictions' about what will happen to the economy with a pinch of salt.
"It is an oft repeated mantra that markets hate uncertainty," he says. "So this period of debate in the run-up to the vote itself and then a potential phase of 'divorce negotiations' in the aftermath of a vote to leave the EU, when the UK would need to pursue bilateral trade agreements, undeniably represents a period of significant risk for the UK economy as investment decisions by businesses and foreign investors would get put on hold.
"But if you're an investor rather than a day trader the thing to do is keep calm and carry on because the one thing I'm sure of is that, whatever outcome we get, the sky won't fall in - life will continue as normal."
So he doesn't think it is a good idea for investors to make significant changes to their portfolios in the run-up to the vote.
"Making big calls around polls and political outcomes can backfire," says Mr Hollands. "Last year [before the general election], some asset managers sold out of UK shares entirely on the basis that opinion polls pointed to a hung parliament, and the prospect of a fragile leftwing coalition leaving a fractious and unstable policy vacuum. As we now know, electors returned a Conservative majority government, markets reacted positively and the UK economy fared well compared to other leading European economies last year."
Leave vote: possible market impacts
Currency
Mr Hollands argues that investors should remember that the UK economy and its stock market are not the same thing. The FTSE 100 is an international market dominated by large multinational firms in which over two-thirds of earnings are derived overseas, principally in US dollars. As such, any fall in sterling that might take place after a leave vote could provide a temporary boost to corporate earnings, dividends and share buybacks, as revenues earned in dollars and euros are translated back into sterling, he explains.
A fall in the pound is one thing that most analysts, whether in the pro or anti EU camp, agree is likely should the UK vote to leave. But the weakening of sterling will present both pros and cons, adds Mr Hollands. UK companies that export heavily into Europe will face headwinds but a weaker pound will make companies with a primary trade focus with the rest of the world more competitive, he says.
Fixed income
But a sharp fall in sterling could mean bad news for UK corporate bonds and gilts, says Tom Elliott, international investment strategist at deVere Group.
"In February, Goldman Sachs predicted a 20 per cent drop in sterling against the US dollar if we leave the EU," he says.
"If the markets are surprised by a vote to leave, sterling and gilts would take a hit because that's one of the most liquid sterling assets and falling sterling would lead to imported inflation, which gilts don't like."
Michael Stanes, investment director at Heartwood Investment Management, also thinks a leave vote could be negative for the UK gilt market as it would raise questions about the UK's ability to maintain its AAA sovereign credit rating. However, he expects that ultimately the Bank of England would seek to support gilts through a new round of quantitative easing, leading them to be considered a safe-haven asset following any leave vote.
Equities
In the equity markets, Mr Stanes believes large-cap UK stocks will weather the storm better than domestically-exposed small- and mid-caps, which are more likely to come under pressure from the resulting economic uncertainty.
He says: "More than half of the UK equity market is owned by overseas investors and it could be vulnerable to weaker sentiment in the short term, particularly among financials and exporters to Europe.
"That said, large-cap UK indices are driven more by global factors and heavily skewed towards cyclical sectors, such as mining and energy, which are in aggregate beneficiaries of weaker sterling. Over the longer term, uncertainty is likely to weigh on financial sectors, as investors struggle to understand any new regulatory regime."
Possible Brexit approaches to take
Considering the potential political and economic upheaval that could follow a UK vote to leave the EU, what steps could you take now?
Do nothing:
Colin Low, chartered financial planner and managing director at Kingsfleet Wealth, says he is advising his clients to take no action and instead continue with a long-term investment focus.
"We're not tactical investors interested in timing the market," he says. "We're strategic investors with a long-term aim in mind so what we ought to do is stick with our allocation broadly, which means that sometimes you will see the value of your assets fall, but in the long run they'll pick up."
But he adds that if a client wanted to take their money out of the market in the next six months they would be better to do this before the vote, rather than risking any uncertainty following a leave vote.
Increase international diversification:
Other advisers suggest investors increase their diversification away from the domestic UK market and towards international assets. "It could be a timely decision to rebalance portfolios in favour of international stocks, bonds and perhaps property," says Mr Green.
"Indeed, many investors should be considering a rebalance anyway, regardless of Brexit. Investing across geographical regions is one of the fundamentals of a well-diversified portfolio - and those with a well-diversified portfolio are best placed to mitigate risk in times of market turbulence and to take advantage of the opportunities."
Consider funds that minimise risk:
Mr Hollands says it is important for investors to realise that the uncertainty hanging over the UK is not only due to the upcoming EU vote, but is reflected around the world due to the poor global growth outlook. Concerns about profit growth in US companies, the Chinese economy and its debt levels, as well as slowing growth in emerging markets, are all reasons to be cautious about markets at the moment. He suggests investors consider absolute return funds which aim to deliver positive returns in all market conditions, with low volatility. He likes Invesco Perpetual Global Targeted Returns Fund (GB00BJ04HL49) and Standard Life Investments Global Absolute Return Strategies Fund* (GB00B7K3T226).
"There is a case for having a little bit of gold exposure in a portfolio as an insurance against another round of currency war," he adds.
Sheridan Admans, investment research manager at The Share Centre, favours Old Mutual Global Equity Absolute Return Fund (IE00BLP5S809). He also suggests investing in funds that take a balanced approach to risk, and says options include Fundsmith Equity Fund* (GB00B41YBW71) and CF Woodford Equity Income Fund* (GB00BLRZQB71) as suitable options for medium-risk investors.
