My prediction for the EU referendum (and how it could impact share prices)
During the last couple of weeks, the opinion polls have shown a surge in support for the campaign to leave the EU. While all polls show slightly different results, it now seems that at the present time Britain is headed for the EU exit.
The reasons for this are difficult to identify since neither campaign appears to have comprehensively won the economic or political argument. Both have been accused of scaremongering and this has turned a number of voters off from the debate. In fact, around 8%-10% of voters are still said to be undecided regarding the vote and they will likely determine the result since it's very, very close at the present time.
However, it's my view that Britain will vote to leave the EU. That's not because I'm necessarily in favour of it, nor do I think it would be a sound move in the short-to-medium term. However, with momentum being so crucial to past election campaigns, the leave campaign appears to be in pole position at the present time.
The effect of Brexit on share prices is a known unknown. However, the stock market tends to price-in what investors believe will take place in future. In other words, a fall in the FTSE 100's price level of around 5% has taken place in the last couple of weeks and this has coincided with the aforementioned rise in support for the leave campaign. This shows that while the FTSE 100 could fall in the aftermath of a vote to quit the EU, it may already be priced-in to at least some extent.
Furthermore, with the FTSE 100 being made up of mostly international stocks, it may be more closely linked to the performance of the global economy than the outcome of the EU referendum. This means that even if the UK economy endures a tough period, share prices may hold up better than domestic-focused assets simply due to their lack of reliance on the UK economy for sales and profit growth.
Of course, while share prices may not fall as heavily as many people expect, they're likely to be relatively volatile. That's because Britain leaving the EU would be an unprecedented event that would cause a high degree of uncertainty over the short-to-medium term. And as history has shown, investors don't particularly like uncertainty so this could cause share prices to move more wildly than is usually the case.
A key reason for this isn't just the prospects for the UK economy, but also for the EU and global economies. Britain leaving the EU could realistically strengthen support in other EU member states for referenda on the same subject and this could give the political union an uncertain long-term future. In turn, the outlook for global economic growth may be downgraded.
Clearly, next week's decision is on a knife-edge, but the polls indicate that Britain is more likely to leave the EU than stay. As such, the coming weeks and months could prove to be a sound buying opportunity for long-term investors if stocks markets become volatile.
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