Beyond Bulls & Bears

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Thin Slicing the Markets: A Serious Referendum for the British Public

In this issue of ‘Thin Slicing* the Markets,’ Matthias Hoppe, senior vice president and portfolio manager for Franklin Templeton Solutions, looks at the altogether serious June 23 referendum on the country’s membership in the European Union. He discusses the seemingly changing mood of the UK electorate toward ‘Brexit’, and how his team has been positioning its portfolio as the day of the referendum vote approaches.

This post is also available in: German

Never let it be said that the British do not have a healthy sense of humour. In March of this year, a UK government science agency enlisted the public’s help in christening a new $300 million state-of-the-art polar research vessel. In an online forum, citizens were asked to submit and vote on ‘inspirational’ names, gallant monikers like ‘Shackelton’ or ‘Endeavour’. When the polls closed on April 16, the public had not disappointed in its response. The winning name chosen in a virtual landslide was ‘RRS Boaty McBoatface’.

However, the vote to stay or leave the European Union is a very serious one for the British public, with significant consequences. Clearly, it is not a decision that can be taken lightly.

On June 23, UK voters will be asked “Should the United Kingdom remain a member of the European Union or leave the European Union?” Since early February, when the date for the referendum was initially set, the majority of British voters have indicated a preference for staying in the EU. In recent weeks, however, we have noticed a marked change in momentum, with the ‘leave’ camp gaining meaningful traction. According to media outlet CNBC, four polls since June 1 have shown a swing toward ‘leave’.

Betting markets have also narrowed, with UK bookmaker Betfair implying a roughly 60% chance for ‘stay’ as of June 14, down from roughly 80% week-over-week. Lastly, and perhaps surprisingly, the latest Financial Times poll suggested 48% for ’leave’ versus 43% for ‘stay’. Markets, which had up until this point been somewhat complacent about a ‘stay’ vote, have moved accordingly.

Why the Erratic Polling Numbers?

It is significant to note that this is not a vote down traditional party lines. The Conservative Party in England is largely divided on the issue, while as much as a third of Labour Party voters are expected to vote ‘leave’. In addition, the referendum is being put to the entire nation, and so the entire United Kingdom becomes a single geographic voting area, as opposed to 650 separate constituencies. Making predictions without the luxury of being able to measure small geographic strongholds that would historically always go to one party or the other becomes quite difficult.

While the consensus still anticipates a ‘remain’ vote, the end result is very much in question. The one-way tide that ‘stay’ had enjoyed for most of the spring has been shaken over the last several weeks. I anticipate the vote will be very close and hence difficult to predict. The markets, not just in the United Kingdom but also in Europe and the United States, are waking to that reality.

Portfolio Positioning

For our purposes, we have sought to position portfolios to accommodate either outcome. In the case of an exit from the EU, we anticipate the pound will likely depreciate substantially. The pound has already become more volatile versus the US dollar and euro as the margin between the projected ‘leave’ and ‘stay’ vote appears to have narrowed.

Thin Slicing chart snip

The pound’s depreciation would likely raise the cost of imports and could lead to higher inflation. Additionally, a ‘stay’ vote may lead to more foreign direct investment in the United Kingdom, which is currently muted due to the political uncertainty. The increase in foreign direct investment could boost economic activity, which would also put upward pressure on inflation.

Whatever the outcome of the referendum, this is clearly a meaningful and profound decision for voters, and one that will have long-term and substantial implications for the British economy, social structure and geopolitical sphere of influence. Certainly a more weighty deliberation than picking the name of a boat.

(And, in case you were wondering, the British government has subsequently rejected the people’s choice for naming their new vessel, opting instead for the more traditionally staid ‘RRS Sir David Attenborough’. In a nod to the citizenry, however, a remotely operated miniature sub on the ship will be named “Boaty”.)

The comments, opinions and analyses are the personal views expressed by the investment manager and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The information provided in this material is rendered as at publication date and may change without notice, and it is not intended as a complete analysis of every material fact regarding any country, region market or investment.

Data from third-party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered by FTI affiliates and/or their distributors as local laws and regulations permit. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction.

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What Are the Risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments.