Alessandro Viviani, a fund analyst at Old Mutual Wealth in Milan, says his company has taken a strong underweight in both UK equities and fixed income due to Brexit concerns. “We maintain a defensive allocation with exposure of 5% to UK equity, compared to a benchmark weight of 8%, and an allocation of 4% to UK fixed income, versus 7% for the benchmark.”
Despite taking all these precautions, Viviani (pictured left) still believes Brexit is not likely to happen. “But if that changes, we’ll reduce our UK exposure further and we’ll hedge all our GBP exposure,” he says. However, completely insulating yourself from Brexit is impossible, he admits. “I’m sure the ensuing climate of uncertainty will be detrimental to financial markets. Even though our portfolios have a defensive allocation with a large exposure to European government bonds and Treasuries, the impact of a Brexit will be negative for us, too,” he says
A recent survey by NN Investment Partners among 91 institutional investors showed Brexit is perceived as a serious tail risk. Even though only a third of respondents deem it fairly or very likely to happen, Brexit is currently considered the most significant risk to their portfolios. An emerging market or eurozone crisis are both seen as a (slightly) lower threat. And Brexit would not only affect the UK negatively, but also the rest of Europe.
Some 60% of respondents to the poll believe Brexit will affect European financial markets negatively. Societé Générale agrees, pointing out in its report that the euro area trade channels to the UK are twice as big as those to China. “Hence, a Brexit would matter more than a Chinese hard landing for the euro area.”
“When it comes to quantifying the economic implications for the rest of Europe, there is no clear consensus, with estimates ranging from ‘very negative’ to even being ‘positive’. Our own view falls in the ‘very negative’ camp, with an estimated hit to GDP growth of 0.5-1% pa for the UK and 0.125-0.25% for the euro area over a decade,” Societé Générale concludes grimly.
A defining moment
From an investment point of view, Brexit looks to almost certainly have more losers than winners. Moreover, the future of Europe hangs in the balance, which is the reason Varoufakis has chosen not to be a cheerleader for the Leave campaign.
According to him, both the Leave and Remain campaigns are at fault by taking the very existence of the EU for granted. After all, the EU is already suffering from existential problems brought about by the eurozone and migrant crises. Brexit could deal it the final blow, believes Varoufakis.
“The great mistake that both camps are making is imagining that the EU is a constant, with the disagreement between them being whether they want to be part of it. But it’s not a constant, it is disintegrating,” he says.
As with all rational discussion, however, what much of this article has failed to do is take account of the human element. And, as Societé Générale points out, there are an enormous number of humans involved in this debate.
The report continues: “The reaction of 28 governments and 28 national public opinions over the next three years to a decision taken by 46m UK voters, and affecting 503m EU citizens, could indeed leave room for surprises.” And, if the UK does decide to leave, the only certainty is volatility and the only thing we know about that is that markets don’t tend to like it much.
