28 October 2016
The killing of British MP Jo Cox, a strong supporter of Britain staying in the EU, has bolstered the chances of that outcome. Photo: Internet
The killing of British MP Jo Cox, a strong supporter of Britain staying in the EU, has bolstered the chances of that outcome. Photo: Internet

Investors should sit out ‘Brexit’ referendum

The market is nervously awaiting the result of Britain’s “Brexit” referendum on June 23.

In times like this, prudent investors like myself prefer to stay on the sidelines but short-term speculators might bet against big investors.

It’s worth noting that big investors armed with technical charts are themselves struggling to predict the outcome of the vote and its implications.

With tons of information out there about the potential political and economic impact of a British exit from the European Union out, investors should not rely too much on technical analysis.

The trend of integration over the past two decades is reversing course around the world and localism and protectionism continue to gather steam.

Even if Britain votes to stay in the EU, there will be similar referendums in other European countries in the future.

The central feature of US presidential candidate Donald Trump’s economic philosophy is protectionism.

Trade protectionism is gaining support in major countries.

At the same time, the wealth gap is widening after years of global integration. Many countries that have benefited from integration are less keen to protect local culture and the domestic economy.

If the eurozone falls apart, it would exert limited economic losses for countries such such Germany, Britain, Italy or France.

It might slow their economic growth slightly and lead to an improved version of the EU.

There are 27 members of the eurozone, all of which have striking cultural and economic differences.

The key question is whether economic slowdown or recession might trigger leadership changes or intensify friction among EU nations.

Increasing geopolitical risks are set to become the trend in the next one to two decades.

The eurozone market will become less attractive if Brexit occurs.

Technology advances have already had a significant impact on EU trading nations. Some EU members are improving trade ties with China and Russia.

The departure of Raghuram Rajan, the central bank governor of India, might reverse the capital flow into India.

For China, uncertainty around Brexit will bring opportunities and challenges.

But short-term and medium-term investors are more concerned about the immediate impact of the EU referendum.

The killing of British lawmaker Jo Cox, a vocal advocate for Britain remaining in the EU, has boosted the odds for that outcome.

Both sterling and euro bond prices rose and British-related Hong Kong stocks also rebounded.

These included HSBC Holdings (00005.HK), Standard Chartered Plc. (02888.HK), as well as billionaire Li Kai-shing’s CK Hutchison Holdings (00001.HK), Power Assets Holdings (00006.HK) and Cheung Kong Infrastructure Holdings (01038.HK).

These stocks might seen further gains if Britain is confirmed to remain in the EU.

The referendum will bring heightened volatility for gold, currencies and bonds, making it quite risky to enter the market.

Meanwhile, the US Federal Reserve is keeping interest rates unchanged as expected, understandably as a question mark hangs over European markets.

However, there are mixed views on the Fed decision. Some believe it has hurt it own credibility by failing to provide a clear direction on future economic performance.

As a result, US economic data will dominate the market for the foreseeable future.

There won’t be any rate hike if Britain leaves the EU, which could further drag down global economic and trade growth.

Investors could buy into some strong risk-on stocks if the Hang Seng Index falls back to 19,600 or 19,800 points.

But they have to get out if the market tumbles below 19,400 points.

They would be better off boosting their cash holding and capping their stock exposure at 30 percent of their portfolio.

This article appeared in the Hong Kong Economic Journal on June 21.

Translation by Julie Zhu

[Chinese version 中文版]

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columnist at the Hong Kong Economic Journal

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