Simmons, deputy head of the UK Investment Office at UBSWM, said in a report Thursday that a Brexit reality would be the worst case scenario as far as the market valuation of the FTSE indices are concerned.
“Should UK citizens vote to leave the European Union, we could see the performance of the FTSE100 index fall by over 10%," she cautioned. "The stock market valuation could drop closer towards valuations seen during the 2012 euro crisis, but this would be cushioned by an 8% boost to earnings from the weakness we foresee in the pound.”
Simmons anticipates the FTSE 250 would be in an even more precarious position post-Brexit, “given that the mid-cap index generates 50% of sales in the UK, compared with just 25% for FTSE 100 sales.”
“The index has already underperformed the FTSE 100 this year,” she highlighted. “Meanwhile, a basket of UK and Europe-exposed FTSE 100 companies has also underperformed the market by 5% and 4% respectively.”
A Brexit outcome would also prove challenging for UK-exposed and cyclical sectors, such as banks, insurance, homebuilders and general retail, which have already had a tough year, Simmons indicated. However, “they could regain some lost ground under a vote to remain.”
Simmons also foresees a “continued depression” in the commercial real estate sector in the initial period following a leave vote, noting that the London market would be “particularly sensitive.” “The listed real estate sector owns 12% of the UK‘s commercial real estate market and about 60% of their assets are in the London market,” she emphasised.
A vote to remain?
Simmons’ forecast for both the FTSE 100 index and domestic sectors in a remain scenario is far more optimistic. She predicts the FTSE 100 index “could rise by up to 5% as uncertainty fades and consumer and business confidence returns.”
Similarly, many of the domestically focused problem sectors she identified, including commercial real estate, “could regain some lost ground under a vote to remain.”
The point is, the health of the FTSE indices and domestic industries is bound up with international investors’ perception of the UK’s future political and economic stability and the benefits from a stronger or weaker pound, Simmons said.
“Many sectors, such as financial services, some housebuilders and consumer discretionary, have already underperformed the market year to date. Ditto the FTSE 250’s performance versus the FTSE 100. It is likely that these recent moves could be compounded in a Leave scenario or unwound if the UK votes to remain.”