If the UK votes to leave the EU on 23 June, London’s benchmark FTSE 100 index could be nursing a hefty 10% loss over the next 12 months, with certain sectors such as housebuilders and other cyclical sectors suffering greater losses according to UBS Wealth Management.
Adopt the brace position
The view of the wealth manager suggests that the performance of London-listed companies is dependent on the outcome of the impending referendum. A vote to leave the EU could send the market crashing, while a remain vote could mean that the blue chip index could surge by 5% giving a 15% variance – a material amount.
In addition, it has been suggested that the pound could plunge to a low of 1.25 against the dollar on the event of a Brexit. These are lows that haven’t been seen for some time, though this would obviously boost earnings for those companies that conduct a meaningful part of their business overseas.
My personal view is simply that the market will remain volatile. As we’ve seen during this shorter week of trading, Mr market has been spooked by the re-emergence of the possibility that the UK voting public will actually vote to leave the single market. If there’s one thing that the market hates – it’s uncertainty. We witnessed this in spades during the build-up to last year’s General Election with housebuilders and some utilities seeing their share prices suffer owing to differing political policies, only to rally strongly when it became clear that there was an outright winner.
Buy defensive or buy for growth?
I’d be among the first to encourage fellow investors to adopt a balanced approach to their investing, with a portfolio consisting of both growth shares and stocks considered to be more defensive such as Unilever (LSE: ULVR) and Reckitt Benckiser (LSE: RB).
And while it can be foolish to shift your entire portfolio into more defensive shares during uncertain times such as these, there is, in my view a case to simply include these low volatility or low beta stocks as a mainstay of your portfolio, whatever the weather.
Indeed, turning to the 10-year chart below, which tracks the share price performance of both Unilever and Reckitt Benckiser against the blue chip index, we can clearly see that these boring shares have left the market for dust.
Getting rich slowly
And if the market-trouncing outperformance isn’t enough – just think of the dividends that have been paid to holders of these shares through both good times and the more difficult years. These dividends can sometimes mean the difference between positive and negative returns, especially in more difficult market conditions such as we’re seeing now.
Unfortunately, many novice investors will often hold a concentrated portfolio, usually compounded further by concentrating on a certain sector (usually the oil exploration and mining sectors).
Often this is folly and leads to either average or poor performance against the market, and as we can see from the chart, the FTSE 100 (excluding dividends) has essentially been flat over the last 10 years, which means that many will have suffered significant losses.