Summer is about to begin and this year will start with one of the most relevant event of the last decade for Europe and the whole world. I’m talking about the Brexit referendum and the consequences of the vote.
BREXIT: a Clearer Portrait
Before any personal observation, it’s important to analyse the forces playing this round.
With this term, Brexit – which is composed by Britain and exit -, we indicate the potential decision of British people to leave the European Union, with which the partnership has never been particularly brilliant since British people decided not to adopt the unique currency.
We can’t take into consideration only the British side of the story, we need to look at a wider picture, which includes other European countries. The growing scepticism towards the European Union, bound to the decisions taken as far as the problem of immigration is concerned, is playing a fundamental role: in fact, if the UK decided to leave, the referendum could have a domino effect, really dangerous for the economy of our continent.
Let’s step back a moment and try to understand how we have come to the referendum.
Before being elected in 2015, one of the promises made by James Cameron during his political campaign was to call a referendum to give British people and the conservative party, Ukip, the chance to express their opinion.
Last February Cameron sought an agreement with the other EU members to improve specific conditions in favour, or I’d rather say “not against”, the UK but many people are still convinced that his deal to defend UK economy and population won’t change the situation much.
But why should the UK leave the European Community? And why should it remain?
Stocks and bonds will be the most affected products while dollar and gold (GLD) – its price has risen recently -, will grant a refugee. However, pay attention, because we may assist to a euro devaluation in favour of the American currency. Even in case you want “to cover” by buying gold, try to maintain your portfolio balanced.
Having said that, we should consider that if the UK effectively leaved the EU, it would take a couple of years to negotiate the terms, period in which it would remain under the European Union regulations.
And what about investments? What shall we have to expect?
BREXIT – YES
Volatility will dominate markets and you should be careful if you use the pounds, because it will be devaluated due to a strong sale of UK stocks, plus many investors and companies will be leaving the UK. The chance for the pair pound/dollar to return to area 1,35 is high (lows 2009).
I suggest to choose euro corporate bond, possibly among those included in the BCE purchase planning.
BREXIT – NO
The last weeks have seen European markets negatively influenced by the pressure of the decision and, if the UK remained, they could start rising again, even with high returns for the regained trust in the European economy. Financial, and insurance sectors would benefit from this conclusion.
Italian and peripheral countries Treasury Bonds, and all pound stocks will turn to be an interesting opportunity.
A “Remain” win would lead to an increasing strength of the euro against the dollar, and of course would push the pound towards its highs in area 1,48.
As far as gold is concerned, we may see a fall in demand and, consequently, in prices that could go back to area 1200.
On Friday we are going to publish an update about the results of the referendum and our analysis of the potential best trades to take advantage of consequent market moves.