What Would A Brexit Mean For The FTSE 100?

With less than four months to go until the referendum on Britain’s membership of the EU, the outlook for the FTSE 100 is uncertain because we’re entering uncharted territory. The outcome of the vote seems likely to be very close and this has the potential to cause weaker investor sentiment in the coming months.

So it seems likely that the FTSE 100’s performance will be held back between now and referendum day. After all, this could be one of the biggest decisions (both politically and economically) for the British people in recent decades and it’s likely to have a huge impact on the domestic economy.

Investors considering buying shares in FTSE 100 companies may decide to hold off for a few months to see what the result is. Similarly, investors nervous about the outlook for the global economy may see the prospect of a Brexit as confirmation that now isn’t the right time to be holding shares and may seek the relative safety of cash or a supposed store of wealth such as gold.

Bulls and bears

As mentioned, uncertainty is likely to be a key theme between now and the vote, so a major bull run seems unlikely (although it can never be ruled out). And if Britain does decide to leave the EU, then it’s very much a case of ‘all bets are off’. In other words, what happens to the FTSE 100 and the economy on Britain’s exit is difficult to predict since it would be unique.

Clearly, both sides of the debate are quoting various figures for employment levels, business relocation (or lack of) and GDP levels that they say would be impacted by Britain leaving or staying. Whether these are accurate or not is up for debate, but when it comes to the FTSE 100, none of this may be all that relevant.

International outlook

That’s because the FTSE 100 is a truly international index that’s far less reliant on the performance of the UK economy than on the global outlook. A fall or rise in employment levels, GDP or in multinationals located in the UK is unlikely to have a major impact on FTSE 100 earnings since its constituents are geographically diversified. And while the UK economy matters greatly to Britons, the US and China remain the major players when it comes to global economic growth.

EU economy

The caveat to that viewpoint, however, is the performance of the EU economy itself. If Britain were to leave then there’s a chance the EU would offer worse long-term growth prospects than currently. Why? As the fifth largest global economy, Britain has a positive overall impact on EU trade and economic activity. Without Britain as a member, it’s possible for the EU to suffer from a similar kind of uncertainty as Britain would do on a Brexit, which could mean a worsening macroeconomic outlook. This would be bad news for the global economy and for the FTSE 100 too.

Of course, history tells us that Britain and the FTSE 100 have endured greater challenges than the question of EU membership. With share prices being low, any further discount could represent an even better time to buy quality stocks for the long term. While their performance may be volatile in the short run, longer term, the UK, EU and world will continue to grow even if trading blocs and political unions change, fade and ultimately disappear.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.