22nd June 2016
Brexit vs markets in charts. Hargreaves Lansdown has set out its view on what the referendum means – it notes that no-one really know – but it also looks at the performance of the FTSE 100 and 250, gilts, bank and retail shares and more.
By senior analyst Laith Khalaf
The first and most important thing to say on this question is no-one knows exactly what is going to happen in the markets on Friday. The outcome of the referendum is in the balance, and on top of that we don’t know precisely how markets will react to either outcome.
In the long run the jury is out on what Brexit means for the stock market, given the number of variables involved. However based on how markets have been behaving of late, we do expect an immediate relief rally in the event of a Bremain vote, and a fall in the event of Brexit. The market is already pricing in some chance of a Brexit, and when we get confirmation one way of the other, we can expect stock prices to swing up or down.
Cyclical sectors, in particular banks and house builders, are likely to do well in the event of a Bremain vote, and vice versa in the event of a decision to leave the EU.
Markets have become increasingly driven by the referendum in recent months, and here are some charts which illustrate the point.
There has been quite a high correlation between the UK stock market and the odds of a Brexit since the beginning of May. This is more pronounced for the FTSE 250 than the FTSE 100, because it is more domestically focussed.
(The charts below show the performance of various market indices against the odds of a Brexit (higher odds mean less chance of a Brexit vote). The odds are presented in decimal form, so a value of 4 means a 1 in 4 chance of a Brexit, or 25%. Or to put it another way, the fractional odds are 3 to 1. The odds are taken from www.oddschecker.com, index data from Lipper)
Cyclical sectors like banks and retailers have likewise seen their share prices heavily influenced by the perceived risk of a Brexit.
One cyclical sector which is dancing to its own tune is the mining sector. Clearly mining companies have problems of their own right now, and are of course heavily correlated with commodity prices. This demonatrates that even though Brexit has been influential in driving markets recently, other factors have been at play too.
The UK gilt market has also been drawn into the fray, particularly in the last few weeks, as investors seeking safety have driven yields to historic lows. In contrast with the equity markets, gilt prices have been moving higher when the Brexit camp has picked up momentum, seeing as they are perceived as a safe haven in times of turbulence.
Finally, as we know, the fortunes of the pound have been heavily influenced by the EU referendum campaign.