On 23 June, Britain will go to the polls to decide if it’s time to bid farewell to the EU. Whatever your views on the subject, there’s a good chance that Britain could leave the union, since the polls remain tight. And judging by the reaction of investors to sudden change in the past, the stock market is likely to fall in the short term in response to a Brexit. That’s not necessarily because leaving the EU would be a bad thing, but rather because no investor likes uncertainty and Britain leaving would be an unprecedented event.
Choices, choices
Of course, it’s difficult to decide how to overcome what’s a potentially major risk to the value of shares over the coming months. One option is to buy now and gamble on Britain voting to remain in the EU. The benefit of this strategy is that there could be a short-term boost to the FTSE 100 since the risk of a Brexit appears to be priced-into the index’s valuation. And if Britain does remain, there could be some kind of relief rally as the status quo will be maintained.
On the flip side, this strategy could be risky and lead to short-term losses if Britain does vote to leave. There’s little escaping this fact, but with the FTSE 100 already offering good value for money compared to historic values (for example a yield of over 4% is historically high), buying now for the long term could be a shrewd move. That’s especially the case since with or without the EU, Britain remains a strong economy that’s set to offer excellent levels of growth in the long run.
The cash option
Another strategy to overcome the EU referendum is to sell up now and remain in cash until after 23 June. The benefit of doing so is that if Britain does vote ‘out’ then this strategy would enable an investor to buy-in at what’s likely to be a lower level. However, on the other hand, it also means that an investor could miss out on a potential relief rally if Britain votes to stay.
Moreover, selling up now is a rather drastic step to take for a risk that’s very much a known unknown. In other words, the EU referendum is one of many risks the FTSE 100 faces at the moment (others being a slowing China, anaemic growth in the EU and a falling oil price) and to sell up now may lead an investor to sell up at the slightest hint of danger in future. With there always being risks to the stock market, selling up frequently could lead to lower returns and higher dealing costs.
Many investors may seek to balance the two strategies discussed above by retaining their current holdings but waiting until after the referendum before buying more shares. Or alternatively selling some holdings but keeping others. While this may reduce the risk an investor faces, it also reduces the potential rewards on offer. And as history has shown, the best times to buy shares have been during the most uncertain periods. Therefore, far from being an event to fear, the upcoming EU referendum could be a superb buying opportunity for long-term investors.
