With a week to go, the result of the EU referendum is looking too close to call. The polls are trending towards exit, but the sampling has been so poor in recent elections, and the mood of the electorate so hard to read, the polls mean less than usual. It could go either way.
The City has convinced itself that Brexit would be a disaster for the markets. Every day brings another warning of the likely impact. The FTSE could be off by 500 or a 1,000 points within minutes of the declaration. The pound could drop to $1.20, and perhaps even parity soon after that. The Bank of England is primed to slash interest rates (insofar as you can still slash them when they are 0.5%).
There might have to be an emergency Budget. No one has mentioned mass starvation, or a plague of locusts yet – but hey, there are still a few days to go. It is therefore no surprise that global investors have taken their holdings of British assets down to 2008 levels and that prices are being marked down. If the result is to leave, there will be a wave of selling pressure. But anyone who can calm down for five minutes should resist that. There are four reasons Brexit will present a great buying opportunity.
Firstly, while EU membership has some benefits for the economy, they are largely oversold. Free trade is mostly governed by global agreements, and what tariffs remain are very minor; relatively few British firms export that much to Europe anyway. True, a few companies will be hit, and some inward investment will suffer. But against that some sectors will be better placed as a few meddlesome regulations are relaxed.
Overall, the UK economy will be much where it was before, with the same strengths and weaknesses. There won’t be any very compelling reason why equities should suddenly be 20% or 30% cheaper.
Secondly, the EU is especially irrelevant to the giant multinationals that make up the FTSE. What possible difference does it make to GlaxoSmithKline or Shell whether the country where they happen to be headquartered and listed is part of the EU or not? Europe is not that crucial to them, and neither is the UK.
If they need to they can easily afford to get an office in Frankfurt, and they can shift their listing as well, although it is hard to see why that could possibly be necessary. If Glaxo is down by 20% on a Brexit vote, that is just crazy – and another good reason to buy the shares.
Thirdly, it looks as if the Bank of England will feel compelled to cut interest rates to stabilise the markets. Expect them to go down to zero. It may even launch some form of quantitative easing, perhaps buying gilts to prevent a rout. The wisdom of that might be questionable in the medium term – the UK economy probably won’t be any worse off. But a stimulus is a stimulus, even if it is misguided. In the short term it will boost the economy – and that in turn will boost the markets.
Finally, the pound will certainly drop in value. It has already taken a beating, and will sink below $1.30 on a Brexit vote and potentially far lower. That will be the natural instinct of the currency traders. But hold on. A devaluation, which is what this will be, stimulates an economy.
In fact, it is especially beneficial when you have low inflation, interest rates close to zero, and a huge trade deficit. Exports will start to rise, and imports fall, which is good news. Ironically, we might find our exports to Europe go up after a Brexit – which is going to irritate the Confederation of British Industry and the Remain mob.
In reality, the City has form on getting the EU wrong. After Black Wednesday, disaster was predicted. In fact, the FTSE went up by 8% in the two days after we left the Exchange Rate Mechanism. The same will happen on Brexit. The smart money will be buying on the morning of the 24th, not selling with the crowd.