How might Brexit impact the UK stockmarket?

In its latest report the International Monetary Fund has warned that Britain's exit from the European Union (EU) "could do severe regional and global damage by disrupting established trading relationships".

Commenting on this, Ian Forrest, investment research analyst at The Share Centre, considers possible effects on the stock market if UK voters choose to leave the EU on 23 June 2016.

According to The Share Centre's recent survey of 2,000 personal investors, 58% believe a 'leave' vote would have a negative impact on their investments.

However, a similar proportion, 62%, said they intend to vote for Brexit in the referendum.

Heavy lobbying

Forrest says: "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 has clout in negotiating trade terms, says Forrest. He believes that big EU companies would be very keen to maintain their current terms with the UK.

"Some will indeed be lobbying heavily with their own national governments, as well as with Brussels, to make sure that relationships continue," he adds.

However, he considers it likely that Brexit would cause sterling to weaken. Companies such as Rio Tinto and Royal Dutch Shell would benefit from this because they generate most of their sales outside the UK, but report in GBP.

But those benefits could be short-lived, once the results of the new trade terms become clearer.

And they could be offset by reduced economic growth in the aftermath of Brexit, and a consequent negative impact on companies with most of their earnings in this country.

Continued volatility

Many companies in the financial sector believe they would be significantly impacted by Brexit, including HSBC, whose chief executive Stuart Gulliver says 1,000 investment bankers could be moved to Paris if Britain did indeed vote to leave.

Forrest adds that there is also a possibility that multinational companies such as HSBC might lose their passporting rights to carry out business across the EU, leading to higher regulatory and administration costs for clients in the UK.

Conversely, freedom from the requirement to adhere to EU rules could mean that some UK financial sector companies may benefit; he cites wealth managers such as St James' Place.

Tighter border controls could also negatively affect sectors such as retailing and construction, he says.

Although it is difficult to predict who will win and lose from Brexit, Forrest stresses that "uncertainty regarding Britain's future in Europe will contribute to continued volatility in the interim period".

BlackRock recently released a statement entitled Brexit: Big Risk, Little Reward. Vice chairman Philipp Hildebrand stated: "We see an EU exit leading to lower UK growth and investment, and potentially higher unemployment and inflation. Any offsetting benefits look more amorphous and less certain, in our view."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.