Why a Brexit vote could shatter your portfolio

Opinion polls conducted overnight by credible polling agencies including the Guardian / ICM suggest voters in the United Kingdom may be leaning towards an exit vote from the European Union.

Just over three weeks out from the referendum the latest major poll has the Leave vote ahead by 52 points to 48 points, although the bookmakers still have an Exit vote as a long shot.

I expect the vote will be extremely close and would not be overly surprised to see an Exit vote come June 23.

This would be shocking for capital markets due to London’s status as a world leader for global asset management activities across equities, commodities, currencies, government / corporate debt and money market holdings that may look for a new home. The potential for capital flight is real, while both the UK and European economies are likely to suffer a nasty hangover in the event of a Leave vote.

However, there is a more alarming scenario capable of playing out.

The Domino Effect

This effect is what has generally triggered most of the great financial crashes of the last century as a single event triggers downstream consequences as a result of the interconnected nature of the global economy and its vulnerability to Europe’s implosion.

The ugly truth is that politically, socially and economically Europe remains a car crash waiting to happen. If the UK were to vote to leave the EU it could be the beginning of the end for political and monetary union across the continent, as other countries like Holland, Spain, Ireland, Portugal and Greece decide to take back control of their own national sovereignty.

A bear case scenario like this could make the shocking global equity market falls of 2012 (due to worries over Greece leaving the EU) seem a walk in the park as Europe’s core trade partners like the US and China catch a cold that leads to global recession.

Investors then would do well to pay close attention to the opinion polls leading into June 23 and to consider any potential impacts on their portfolio if the UK votes to leave the EU.

Companies listed on the ASX that are likely to come under immediate selling pressure in the event of a Brexit vote include:

  • Henderson Group plc (ASX: HGG) – 3.5% today to $5.32
  • CYBG PLC CDI 1:1 Clydesdale Bank (ASX: CYB) – 5.3% today to $5.50
  • BT Investment Management Ltd (ASX: BTT) – 1.6% today to $9.87
  • Macquarie Group Ltd (ASX: MQG) – 2.03% today to $73.25
  • Iress Ltd (ASX: IRE) – 1.8% today to $12.25

Financials like the banks and other fund mangers are likely to be worst hit in the event of a Brexit vote, although they probably won’t be alone.

This means one of the best ways to protect your portfolio is to buy top-quality income shares. Such as those below….

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Motley Fool contributor Tom Richardson owns shares of Macquarie Group Limited.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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