Brexit: Bye Bye Baby….?

“Should the United Kingdom remain a member of the European Union or leave the European Union?” That is likely to be the even-handed question to be set before the 46 million strong UK suffrage by the end of 2017 (but could be as early as May/June this year).

With the release of a 16 page EU renegotiation statement by Donald Tusk, President of the European Council, the pound continued to gain strength against the dollar (although only slightly from the 7 year low of two weeks ago) suggesting that the prescribed concessions were more than expected. But whether they will develop enough substance to sway the nationalistic British public to vote to stay “In” a reformed EU will be a question that only the eventual referendum will answer.

Exane’s award winning equity research team have developed three strategies for individuals to take advantage of either an ‘in’ vote, ‘out’ vote, or to benefit from UK monetary easing even against near-term inflation risk.

1975 redux
June 1975 was the last time the British people were offered a vote on European Union membership. It was a different era. The best-selling single of the year was Bay City Rollers’ ‘Bye Bye Baby’. But when it came to the crunch, the UK did not say Bye Bye, voting comfortably in favour of continued EU membership. Much has changed. But in terms of the vote result we sense history can repeat.

Fortune favours the Dave – June is live
Tuesday’s draft EU ‘deal’ shows the outline of an agreement. It will not settle the debate in the UK, but at least it looks like David Cameron will have his deal signed at the 18/19th February EU summit. This opens the door for an early vote, probably 23rd June. A Cameron endorsement may well start lifting the ‘in’ support from this point. Any evidence of this and ‘Brexit’ market fear will start to dissipate.

There is something in the price
There is some evidence of a ‘Brexit’ risk premium in UK asset prices. This is warranted given the macroeconomic uncertainty an ‘out’ vote would crystallise. But referendum results tend to back the status quo, and the detailed polling suggests some weakness in ‘out’ support. For investors, we are starting to see some relative trading opportunities.

Portfolio trades – 3 strategies
Exane have prepared three stock baskets:

  • First, for risk takers confident in an ‘in’ result, they list the UK domestics that should see relative support on an ‘in’ result – many of these have lagged over recent weeks as the Brexit issue has worked into markets.
  • Second, Exane look for non-obvious hedges. UK names with index linked revenue streams that could benefit from UK monetary easing even against near-term inflation risk.
  • Finally, for investors who envisage an ‘out’ result, Exane name the low beta, overseas earners that would see the local share price compensation for weaker Sterling – just beware of a potential sterling bounce.

To view Exane’s complete strategy research on the Brexit, please click here.

If you would like to learn more about the above three strategies, please contact your Intelligent Investments’ Wealth Manager today.


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