A vote to leave the European Union in June could see the FTSE 100 fall by over 10% in the next year and see sterling dollar fall to 1.25 and sterling euro fall to 1.20, according to UBS Wealth Management.
Caroline Simmons, Deputy Head of the UK Investment Office at UBS Wealth Management, believes that the performance of the UK’s largest 100 companies’ shares could vary by over 15% in a 12 month period depending on the outcome of the EU Referendum. If the UK votes to remain, the large cap index could rise by up to 5% as uncertainty fades and consumer and business confidence returns.
"Should UK citizens vote to leave the European Union, we could see the performance of the FTSE100 index fall by over 10%. The stock market valuation could drop closer towards valuations seen during the 2012 euro crisis, but this would be cushioned by an 8% boost to earnings from the weakness we foresee in the pound. If on the other hand the UK votes to remain, the FTSE 100 could rise by up to 5% over 12 months, with further upside capped by pound strength."
The FTSE 250 could be affected to an even greater extent, given that the mid-cap index generates 50% of sales in the UK, compared with just 25% for FTSE 100 sales. The index has already underperformed the FTSE 100 this year. Meanwhile, a basket of UK and Europe-exposed FTSE 100 companies has also underperformed the market by 5% and 4% respectively.
As well as mid-caps, UBS Wealth Management believes that the segments most negatively impacted by a vote to leave the EU could include UK-exposed and cyclical sectors, and cross-border trade companies. Commercial real estate and house prices will likely be determined by credit conditions, which could deteriorate under a vote to leave the EU.
UK-exposed and cyclical sectors: Banks, insurance, listed REITS, homebuilders, general retail and leisure are the types of domestic sectors which may react the most negatively to an exit from the EU. Similarly, they could regain some lost ground under a vote to remain.
Cross-border trade companies: Should the UK become subject to increased trade tariffs due to no longer being in the EU, exporting companies would face rising costs. Those having both their headquarters and manufacturing bases in the UK but selling their products internationally are likely to be the most impacted, although this could be somewhat offset by currency effects as a result of a weaker pound.
Commercial real estate: Following a recent decline in transaction volumes, UBS Wealth Management believes we could see a pick up if the UK votes to remain, but continued depression in the event of a leave vote until the shape of the exit becomes clear. As debt accounts for approximately half of the funding of the UK’s commercial real estate sector, any increases in loan costs owing to spread expansion could lead to incremental costs. The London commercial real estate sector is particularly sensitive, as the uncertainty surrounding future demand for London space, combined with lower UK GDP, could lead to a decline in rents and thus capital values. The listed real estate sector owns 12% of the UK’s commercial real estate market and about 60% of their assets are in the London market.
House prices: House prices are up 1.6% so far this year and UBS Wealth Management forecasts house price growth of around 6% by the end of the year if the UK votes to remain. If the Leave camp is victorious, however, lower growth could be expected. In any event, London, where house prices have risen fastest over recent years, and where international investors are more important, is likely to be impacted more heavily by a vote to leave than the rest of the UK.
Under a scenario where the UK votes to leave, the international investor’s perception of the future economic and political stability of the UK would need to be squared up against the potential benefit from a weaker pound.
"Many sectors, such as financial services, some housebuilders and consumer discretionary, have already underperformed the market year to date. Ditto the FTSE 250’s performance versus the FTSE 100. It is likely that these recent moves could be compounded in a Leave scenario or unwound if the UK votes to remain.
"Today the equity market is pricing in less risk of an exit than it was at its peak in March and early April".