Update on approaching Referendum

Most of the media attributed the week’s renewed equity market sell-off to fears that the UK electorate may just decide on Brexit. At least the poll trends seemed to indicate as much. The weakness of £-Sterling which has recently fallen 4% against the €-Euro and 5% against the US$ and that the near 6% fall in UK and other developed markets’ shares over the past week looks a consequence of the markets suddenly pricing in a UK exit from EU membership.

The equity markets decline started at exactly the point at which the European Central Bank (ECB) accelerated its QE (quantitative easing) bond buying program in their efforts to provide additional monetary stimulus to European businesses and consumers. With the ECB becoming a substantial and persistent buyer of Euro bonds for the foreseeable future. It is reasonable to conclude that investors have reacted rationally by taking profits in equities which had become overbought and shifted into bonds to capitalize on ECB’s pledge to fulfil its seemingly insatiable demand for bonds – at any price.

This has led to falling bond yields globally. It is bad news for savers, despite the fact that such actions have provided effective temporary economic stimulus for the countries that engage in this practice.

The most anticipated financial news of last week was the US Federal Reserve’s announcement on interest rates. Although we had expected an indication of a further rate rise in July, it was not entirely surprising based on the latest economic data releases in the US and around the world that the Fed felt differently. The Fed also expressed that there was no requirement for a rate rise at the moment.

This was far more ‘dovish’ than the ‘hawkish’ statement expected and could  lead one to believe that major central banks are  keen to err on the side of being overly supportive of markets ahead of the UK’s referendum, thereby providing  a ‘monetary airbag’ in case a Brexit vote should cause market turmoil.

In the UK, Bank of England followed suit and left rates unchanged at 0.5%. This had been widely expected. Governor Mark Carney continues to reiterate that the biggest risk to the UK’s near term economic growth prospects is indeed a ‘Leave’ majority at the referendum.

Where does this leave us in the upcoming EU Referendum week?

If the feared exit doesn’t happen and markets rebound swiftly, investors tend to be reluctant to get back in at higher prices and miss substantial upside while they deliberate. On the other hand, if the market upsetting exit does occur and the de-risking decision has reduced losses, then investors try to time their re-entry into the markets. Research has shown that market-timing rarely works on a consistent basis. Investors tend to wait too long; they re-enter when the markets have recovered beyond where they stood before the event. This at least was the widespread experience with private investors over the course of the 2008/2009 Great Financial Crisis.

As we previously reported, it is our intensions to invest the cash holding in portfolios that previously was held in UK and European equities straight back into the same funds from where the money came if the UK votes to  ’Remain’ . In the event of a ‘Leave’ result we will stay in cash until our next re-balance in July.

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