With the EU referendum around a month away, many investors are concerned about the near term prospects for the FTSE 100. Clearly, there’s a real chance that Britain will vote to leave the EU on 23 June, with the polls showing that there’s little in it between the respective campaigns. And with the result likely to hinge on currently undecided voters, the pollsters seem to offer little accurate guidance at the present time.
Of course, a vote to remain in the EU would probably not have a negative impact on the FTSE 100 in the short run. That’s because it would be a case of keeping the status quo and with investors liking certainty and disliking change, the FTSE 100 could benefit from a bounce of a similar kind to that which was seen after the General Election a year ago.
Short-term fall
However, a vote to leave the EU could cause a fall in the price level of the FTSE 100 in the short run. That’s not because leaving the EU is necessarily bad news for the British economy, but rather because investors are likely to become nervous regarding the future of the not just the British economy, but also the EU and global economies.
The reason for that is the EU economy remains exceptionally weak. While the US is now seeking to raise interest rates following a period of loose monetary policy that has strengthened its banking system and delivered consistently improving economic data, the EU is still seemingly stuck in neutral. It’s undergoing a major quantitative easing programme at the present time and if it doesn’t work, there could be further stimulus in the coming months and possibly years. And with the prospect of an interest rate rise still very distant for the Eurozone, the outlook for the EU economy is highly challenging.
If Britain were to leave the EU then it could cause uncertainty not just for Britain in the short run, but for the EU in the long run. The project is likely to at the very least come under additional scrutiny by investors and this could lead to a general worsening in sentiment across the globe as an opaque outlook for the EU could cause downgrades to global economic growth forecasts. While the EU is most likely to survive a Brexit, its future could be less bright than it has appeared to be in the recent past.
Clearly, the British economy is a key part of the EU, since it’s the fifth biggest economy in the world. While most of the FTSE 100 incumbents are international companies that rely on the rest of the world for the sales and profitability, their share prices could be impacted by a general global slowdown caused by Britain leaving the EU. In such a situation, there are likely to be buying opportunities for long-term investors, although volatility and uncertainty may prove to be above average for a sustained period of time.
