Jeff Salway: EU referendum raises investment fears

Smaller companies with less exposure to Europe likely to be least affected by increasing market uncertainties, writes Jeff Salway

Many people are increasingly worried over how the 2017 referendum will affect the cash they hold in pensions and investments. Photograph: Getty

Scots with savings in pension and investment funds face a fresh period of uncertainty following confirmation of an EU referendum that threatens to cause a slowdown.

The referendum will take place in 2017, according to last week’s Queen’s Speech, which also created confusion over the future of state pension protections.

The immediate concern for many people will be how the referendum affects the cash they hold in pensions and investments. Experts had warned before the general election this month that the EU referendum was a bigger concern than the possibility of a hung parliament.

While the consensus is that the UK will decide to remain in the EU, speculation will inevitably grow over the possible implications of a No vote that would likely spark calls for another Scottish independence referendum.

Simon Lloyd, chief investment officer at Murray Asset Management in Edinburgh, said: “David Cameron has learnt at least one lesson from the Scottish referendum and phrased the question on EU exit so as to be campaigning for a ‘Yes’ vote. But markets hate uncertainty and if the vote looks close, then we could see this reflected in a falling market.”

He predicts increased economic uncertainty and investment market volatility as the referendum nears. “If we see the pause in activity that we saw in Scotland, then economic numbers may look less than rosy resulting in further volatility,” said Lloyd. “While the UK may exist quite happily outside the EU, in the event of a vote to exit the international view is likely to be negative.”

Investor attention is now turning to the types of companies that are likely to be affected by the referendum and, by extension, what that means for investments exposed to those sectors.

David Thomson, chief investment officer at VWM Wealth in Glasgow, said: “We have already seen some early high-profile shots fired in the war of words, with Deutsche Bank saying it will move its trading operations from London if there is a UK exit. It may also have an impact on HSBC’s review of a move of its headquarters to Hong Kong – taking jobs and tax revenue with it.”

While banking is more likely than most sectors to be negatively impacted, Thomson said any large businesses with Europe-wide operations and/or markets will be affected by a UK exit. “Consequently we can expect the noise from these organisations to intensify in the run-up to the referendum as they highlight the prospect of job losses,” he said. “The longer it drags out, the more business will put off making decisions.”

Smaller companies are less likely to be hit by the referendum, except those with significant import or export operations in Europe.

“Consequently a better and more diversified place to invest in the run-up to the EU referendum might be a smaller companies fund where the underlying companies are less obviously affected and where a business-friendly environment might favour growth,” said Thomson.

He singled out the Henderson UK Smaller Companies as one fund that’s “been fairly consistent in recent years”.

“But if you really wanted to avoid the larger companies then Marlborough’s UK Micro Cap Growth fund might be worth considering, although it is likely to be volatile,” said Thomson. “For the more risk-averse investor a property fund such as Standard Life UK Property may be the answer, so long as they don’t lose too many high-profile tenants.”

Yet while investors will be anxious about the referendum, those in it for the long-term – including people with cash in workplace and personal pensions – shouldn’t be distracted by short-term events, said Barry O’Neill, investment director at Carbon Financial Partners. “My message to investors is that political uncertainty is just one of the many dynamics that gets factored into the price of any asset on any investment market,” he said. “There will always be issues for markets to navigate their way around or through, but a look back at history shows us that they invariably find a way to do so in the long-run. Allocate your capital to the right markets on a long-term basis and be an investor, not a speculator.”

The UK accounts for just 7 per cent of global stock markets, he pointed out, with developed European markets making up another 15 per cent. “That means that almost 80 per cent of the world’s stock markets are outside this region. Similarly with bonds, around two thirds of the world market is outside these regions,” said O’Neill.

The Queen’s Speech also included an implicit pledge to maintain the “triple lock” on the basic state pension until 2020, ensuring it increases each year by whichever is the highest of inflation, earnings or 2.5 per cent. The impact of this on the flat rate pension coming into force next April isn’t clear, however, with the value of the payment still unconfirmed.

“Tomorrow’s pensioners need clarity now on whether the triple lock applies to the new single tier pension from April 2016,” said Kate Smith, regulatory strategy manager at Edinburgh-based insurer Aegon. “Remember that not everyone will get the full single tier pension due to complicated transitional arrangements. People need certainty now, so they can plan ahead and live in dignity and security in retirement.”