INVESTORS in house building firms and banks could have a nasty surprise if Britain votes to leave the European Union, according to a study from a major wealth management firm.
Supporters of Brexit, including London mayor Boris Johnson, believe the UK will have a brighter future outside the EU.
The London mayor has placed the issue of sovereignty at the centre of his case to leave the EU, claiming that the loss of control to Brussels has become “injurious to government in this country”.
However, a study from UBS Wealth Management, which has an office in Leeds, claims that the FTSE 250 will under-perform if voters support Brexit.
On a more positive note, the study concludes that investors in some US-focused companies could find reasons to be cheerful if we decide to sever our links with the EU.
Caroline Simmons, the deputy head of the UK Investment Office at UBS Wealth Management, predicts that companies and sectors with the greatest exposure to the UK economy will be the worst performers following a Brexit.
She also claims that markets will remain volatile, and sensitive to news about Brexit, during the lengthy referendum campaign.
Fears around Brexit have already been priced into the market, in the form of a weaker pound, and this could continue in the run-up to the June 23 referendum, Ms Simmons said.
The wealth management firm believes that these currency headwinds may also have a knock-on effect on UK equities.
Ms Simmons said: “While the FTSE100 could experience some selling pressure due to its large international investor base, the currency boost to the large cap index from a weaker pound, combined with lower exposure to the UK economy will likely win out, leading the FTSE 100 to outperform the FTSE 250.”
The shares in banks, house-builders, general retail and leisure firms will react most negatively to Brexit, according to UBS Wealth Management.
The global financial firm’s research indicates that the banking sector is one of the most exposed to changes in the UK’s relationship with the EU.
A widening of UK credit spreads, or a change in the UK sovereign credit rating, could lead to higher funding costs for the UK banks, which would lower margins and profitability, Ms Simmons’ report argues.
Ms Simmons believes that domestic banks would be more heavily affected than UK international banks, partly due to their larger exposure to the UK property market.
Consumer sentiment would deteriorate, and the banks’ funding costs would increase, leading to a tightening of credit conditions, the study argues.
The report contains a warning for retailers.
If Brexit uncertainties weigh on economic activity and consumer sentiment, then the domestically-exposed general retail and leisure sectors would be likely to suffer, the study said.
Ms Simmons said, that while there may be the potential for further rate stimulus from the Bank of England post-Brexit, the weaker economic backdrop is likely to play a larger role. The report said that insurance, real estate and utilities could also face downward pressures because their activities are so heavily exposed to the UK economy.
But Ms Simmons believes the news isn’t all bad: “Companies most exposed to the United States will be the least impacted in the case of Brexit.
“US-exposed equities will benefit from stronger sales, and avoid concerns about a UK or European economic slowdown.”
There could be opportunities for investors who decide to focus on sectors that are relatively unaffected by the consequences of Brexit.
UBS Wealth Management predicts that energy, materials, beverages, and tobacco will benefit the most from a weaker pound, and reduced exposure to the weakening UK economy.
The debate over the potential economic consequences of Brexit has split the country.
London Mayor Boris Johnson, who opposes British membership of the European Union, has claimed that sterling would benefit if Britain voted to leave the bloc at the June 23 referendum.
Mr Johnson claims that Brexit would free the economy from EU regulations, and the pound would ultimately benefit.
Supporters of the campaign to keep Britain in the EU believe that membership of the bloc brings many advantages.
For example, it makes selling things to other EU countries easier. They fear that the UK’s reputation will be tarnished, and the country will become isolated, if we leave the EU.