Brexit: UK economy's winners and losers

While a vote to stay in the European Union (EU) would probably mean business as usual, a vote to leave the EU is likely to bring various consequences.

Ed Smith, asset allocation strategist at Rathbones, says that the FTSE 100 would not be hugely hit because of its constituent companies' international exposure, but certain sectors and small- and mid-caps in the FTSE 250 are more likely to suffer.

"The times are long gone when the FTSE 100 was representative of the UK," says Smith. It is now a global index, with 70% of its revenues coming from overseas.

The basket of those companies in the FTSE 100 that are most exposed to the UK have been underperforming, but Smith explains that this is not because they have fallen in value, but rather due to the rally in oil, gas and mining companies over the last few months (so domestically focused companies in other countries would show the same trend).

Companies at risk from Brexit

However, companies with a domestic focus would be at risk, because investors would be less likely to invest in the UK and GDP is likely to drop.

According to the annual Ernst & Young Attractiveness survey, which monitors investment into the UK among other things, only 36% of investors say the UK would become attractive as an investment opportunity, compared to 54% last year.

Further, companies in the UK with a European focus would be at risk in the case of a Brexit. Sectors which trade with the EU, such as auto manufacturers, clothing and agriculture, could experience a drop in value because their tariffs for doing business with the EU would rise.

Smith argues that the financial services sector would be most at risk if the UK leaves the EU. The sector would not collapse, but over time regulatory costs would increase as the EU would make it harder for those outside its union to do business there.

Referring to the Treasury's prediction that the economy would shrink by between 3.6 and 6% after two years if the UK voted to leave the EU, Smith says these estimates are at the upper range of other forecasts.

"Whatever the long-term implications [of Brexit], it is hard to argue that in the short term, GDP won't take a hit," says Smith.

He suggests that investors could shift their sector biases to those sectors which have the lowest correlation to lower GDP growth in the UK, such as commodities and industrials.

Sterling moves

In case of a Brexit, says David Coombs, head of multi-asset investments at Rathbones, prime minister David Cameron would step down and the Bank of England might take the lead role.

Sterling has already fallen by 8% since its peak in November 2015, says Coombs, and on voting day it might rise or fall by as much as 4%.

If the UK left the EU, then "you wouldn't want to be overweight in the eurozone". We are seeing a polarisation in politics, in the UK as well as Germany, Austria, Holland and France. If the UK was to leave, other EU countries might become further politically polarised.

Buying opportunity

Commenting on his outlook on the EU referendum, Mike Amey, portfolio manager at PIMCO, assigns a 40% probability to the UK voting to leave.

Uncertainty over the outcome, he says, has already "slowed economic activity, pressured UK bank assets, reduced liquidity in sterling-denominated corporate bonds and put sterling under pressure".

He views the recent underperformance of UK bank bonds as a buying opportunity, and thinks the best way to hedge against Brexit is by selling the pound relative to the dollar. "In the event of a vote to leave, we see a 10% devaluation of the pound against the dollar."

This article was originally published by our sister magazineMoney Observer here.

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.