Interactive Investor

FTSE 100 drama just hours away

22nd June 2016 14:19

Lee Wild from interactive investor

The clock is ticking. In just a few hours, polling stations will open the length and breadth of Britain. What happens between then and 10pm when voting ends will, with absolute certainty, drive massive movements in equity markets come 8am Friday morning. Which way they go is, however, still far from certain.

Last night's televised Wembley debate went to 'Remain' - just - but the standing ovation given to Boris Johnson's "Independence Day" speech shows the strength of feeling generated by Europe debate.

However, latest betting has a 'Remain' vote at as much as 2-9 odds-on, which implies an 82% chance that we'll still be part of Europe come Friday morning. 'Leave' has drifted out to 3-1 against, putting the chance of winning at just 25%.

It's worth remembering, though, that around 1 in 10 voters are still undecided and over one million signed up to vote during an Electoral Commission awareness campaign. That's a big unknown quantity. There's also a risk that foul weather may keep people indoors.

First results are expected to dribble in from half-past midnight, with half the 382 counting areas expected to have reported by 4am. An hour later, 80% will have handed in their results and we could have a clear winner by breakfast time.

Markets are currently backing the bookies - and Bremainer David Beckham - on this one; and in a big way. Since plunging to 5,899 last week, the FTSE 100 has staged a remarkable recovery which tracks a swing in opinion polls back toward 'Remain'.

Up another 52 points Wednesday to 6,278, the blue-chip index has made up 379 points, or 6.4% in the past six days. We're now back to levels last seen just before the 'Leave' campaign raced into a lead of as much as 10 points in one poll.

Clearly, markets are pricing in a 'Remain' victory with some gusto. My colleague Rebecca O'Keeffe put it perfectly this morning: "With less than 24 hours before voting starts, markets are now pricing in virtually no risk of an exit vote."

But she did raise a key question about whether the rally was overdone and how much upside still existed for investors. My personal view has always been that if we stay in the EU, the FTSE 100 will, at the very least, return to 6,400. With a dirty great cloud of uncertainty removed and in the initial euphoria of victory, the index would most likely go even higher.

Research published by UBS this morning appears to agree. Strategists at the investment bank pencil in a move of as much as 7% on a 'Remain' vote to 6,690, although one thinks 6,800 could be on the cards. The Euro Stoxx 50 index is tipped to surge by 5-15% and the S&P 500 by 2-3%, which would take the broad-based US index to a record high.

Among other assets, oil could jump by 2-4%, gold would fall by 2-6%, and investors might expect a rise in 10-year Gilt yields of as much as 10 basis points.

On the flipside, if 'Leave' stages a fightback the inevitable carnage could send the FTSE 100 plunging by up to a fifth to 5,075. One UBS analyst even thinks it could go as low as 4,900. The index hasn't been that low since 2011. Gold could rally by 16%, says the broker.

Interestingly, Credit Suisse this morning repeated its confidence that any sell-off in UK equities would present a 'buy' opportunity. "The FTSE currently looks c.10% cheap on our model - recall c.70% of FTSE earnings come from outside the UK. Into a full Brexit scenario, our FTSE 100 year-end target would fall to 6,200 from 6,600."

If the worst happens, I'd take that!

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