YOUR PORTFOLIO
/ EU REFERENDUM /
EUROPE:
THE FINAL
COUNTDOW
Cherry Reynard weighs up the prospects for a number of key UK
sectors for either outcome of the upcoming referendum
T
he referendum on the
UK’s membership of
the EU is now just a few
days away. Although at
the time of writing,
sterling has recovered in
anticipation of a “remain” vote, there
is still sufficient doubt on the
outcome that valuations in certain
vulnerable sectors remain cheap. In
the event of an “in” or “out” vote,
how can investors expect their
portfolio to behave?
First, it should be repeated
that the referendum may decide
nothing. If the UK votes to leave,
no one knows the terms on which
it will do so and therefore the likely
impact on individual companies.
If it votes to remain, but only by a
narrow margin, it may not settle
the question with the decisiveness
markets would like.
Some clues can be drawn by
the way markets have behaved
to date. Since the start of the year,
the standout winners in terms
of sector performance have been
2
trustnetdirect.com
trustnetdirect.com
those related to commodities and
consumer goods, while financials –
particularly banks – and consumer
services have fallen well behind.
Equally, the FTSE 100 index
has outperformed the FTSE 250
by around 2.5 percentage points
in 2016.
There are other factors at work
– the FTSE 100 has been pulled
higher by its large exposure to
mining and commodities, while
the recovery in the oil price has
undoubtedly given it a boost.
However, the higher weighting to
internationally focused companies
over the more domestic focus
of the FTSE 250 may have been
a factor at the margin with the
prospect of Brexit hanging over it.
Recent market activity has left
some disparity in the valuation
of individual sectors: for example,
the consumer goods sector now
trades on an average price to
earnings (P/E) ratio of 19.72x,
with food and drinks producers
looking particularly expensive.
Fund managers have highlighted
this discrepancy of “international
= expensive” versus “domestic =
cheap”. This disparity may remain
until the vote, but could either
tighten or widen, depending on the
outcome. With that in mind, what
could happen to the Brexit-exposed
areas after the vote?
FINANCIAL SERVICES
Financial services would be the
most vulnerable area to Brexit. A
recent report by TheCityUK, says:
“Passporting allows UK-authorised
financial services firms to sell
services in any other EU member
state. Passports protect against
discrimination, giving UK-based
firms the right to do business on
the same terms as local firms.”
As such, financial services
businesses could expect to be
hit hard by a vote for Brexit. A
report for Woodford Investment
Management from Capital
Economics said: “Britain’s financial
services exports to the European
3