If the British people vote for Brexit on the 23rd of June, the FTSE 350 is set to lose 21% of its value, according to Axioma, which used swap spreads bought by investors to hedge against Brexit as a basis to assess its likely impact on asset prices.
Dollar-based investors will lose even more money, as Axioma’s stress test predicts Brexit will result in sterling depreciating by 10% against the greenback.
Gilts for protection
As they are considered a safe haven, gilts are expected to be more resilient, losing only 3.9%. However, Axioma’s model assumes the Bank of England will leave interest rates unchanged after Brexit. If they lower interest rates to mitigate the impact of the vote, gilt yields might well edge down instead, providing investors with some compensation for the losses suffered in the equity part of their portfolios.
Euro-denominated assets will also decrease in value after a Brexit, with the euro going down 3.9% against the dollar. Overall however, euro-denominated stocks and bonds are believed to suffer less than half the losses of their sterling equivalents in percentage terms, though these will still be significant.
In another research note, Axa IM estimated that the sterling investment grade (IG) index could widen by 25 basis points if Britain votes to leave, which would translate to a performance hit of 2% (assuming unchanged rates) or 40% of the total return year to date. "A widening by 50bps over the summer is a distinct risk and that would wipe out most of the total return year to date," Axa IM said. "One silver lining from a valuation angle is that, upon a remain result, a retracement towards fair value could see the index tightening by 10-15bps."
Upon a leave outcome, sterling IG would also likely underperform euro IG, reaching a spread to the latter of around 30bps and giving an underperformance of around 1.6%, said Axa IM.