Where is safe to invest if Brexit happens?

With the prospect of Brexit being very real, the present time is a difficult one for investors. After all, the polls seem to be too close to call and it appears likely that the decision could go either way. Clearly, if Britain decides to remain in the EU then the outlook for the UK may not be markedly different than it has been in recent months, but a decision to leave could cause a degree of uncertainty in the short term at least.

Clearly, this doesn't necessarily mean that Brexit would be a bad thing in the long run, but with investors generally not liking uncertainty and Brexit being an unprecedented event, it seems logical that riskier assets may come under pressure following a vote to leave the EU. As such, it would be of little surprise for shares to fall in the aftermath of Brexit, although the extent to which they fall could be highly dependent on their exposure to the UK economy.

For example, companies that are highly dependent on the UK for their sales and profitability could be hit much harder than international companies that have little or no reliance on Britain. As such, UK-focused banks and retailers could be hit harder in the short term than international resources companies or consumer stocks that have considerable exposure to emerging markets, for example.

Housing market problems

While share prices may be somewhat hit-and-miss following Brexit, the outlook for UK house prices is arguably much clearer. Non-UK buyers could dry up as the certainty that has attracted them in recent years is eroded in the short term, while the potential for higher interest rates may price many more UK buyers out of the market. Alongside increased stamp duty for second home buyers and refreshed tax laws regarding offsetting mortgage costs against income, UK property lacks appeal at the present time.

Although other assets such as cash and bonds could become increasingly popular in the short term following Brexit, holding too much of either within a portfolio could lead to disappointing long-term returns. Inflation has the potential to rise if sterling weakens since imports will become more expensive, which could lead to negative real returns for both cash and bonds. And with interest rates having the potential to rise, bond prices may not perform strongly following Brexit.

Discounted valuations

Of course, keeping some cash on hand in case of a fall in the value of shares following Brexit appears to be a sensible option. This could help investors take advantage of discounted valuations, although as mentioned it may be a case of taking each stock on a case-by-case basis since falls may not be uniform across the board.

One asset that may perform well in the case of Brexit is gold. That's because investor sentiment across the globe could come under pressure as the UK and EU's economic performance is cast into a degree of doubt. However, with US interest rate rises on the cards and gold lacking any income return, even precious metals have an uncertain future.

Therefore, for long-term investors the optimal move appears to be to diversify and keep some cash on hand in case opportunities present themselves over the short-to-medium term.

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