This Thursday, 23rd of June, Britons will be deciding whether to stay in European Union or not. Possible economic consequences were widely discussed in recent weeks. Even Fed took into account possibility of Brexit when deciding about raising interest rates. How will markets react in case Britain will stay or leave the EU and how can we profit from that?
If they will remain in EU, we can expect indexes FTSE100 and Euro Stoxx50 rally, strategists from Morgan Stanley expect them to rise 14% and 16% respectively. When looking at other estimates, stock indexes will likely go up, but not that significantly. That´s not true for all companies from every sector, for instance gold miners are in this case likely to decrease in value.
Besides stocks, we can profit from an idea that they would stay betting on currencies. Pound is likely to increase in value against both dollar and euro. Analysts from Goldman Sachs also expect that euro “would likely see a decent upside move” against dollar, citing Goldman Sachs report.
We can mention commodities, assuming the Britain will stay, the gold is expected to decrease in value. And of course bonds, we can possibly see rise in core bond yields as demand would weaken.
Now, let´s take a look at other side, Britain leaving the European Union. Well, the opposite of what is written above is likely to happen. Stock indexes would be hardly hit, wealth management unit of UBS Group AG expects index FTSE100 to drop 10%. Especially vulnerable are middle-sized companies with big exposure and sales in UK, on the other hand big companies with sales outside UK are likely to suffer less. We mentioned gold miners, these companies are expected to rise in value in case of Brexit.
Moving to currencies, we will likely see drop of British pound, most of analysts surveyed by Bloomberg forecast drop to 30-year lows. Also euro is expected to weaken. Currencies that will rally are Swiss franc and Japanese yen, traditional safe havens.
If Britons will decide to leave, gold will probably rally and core bond yields will decrease as demand for these assets will persist.
In order to profit, we have to be right about the result of the referendum. Then we have to choose right financial instruments that will allow us to profit. For example if we are sure the Britain will stay in EU, we can buy leveraged ETF shorting EURGBP and hedge it buying stocks of gold miners.