Stocktake: Fasten your seat belts for Brexit results

Fasten your seat belts for Brexit results

Whatever way Thursday’s Brexit vote goes, one thing is certain – markets are going to be volatile.

It hadn't looked that way for a long time. The smart money didn't envisage Brexit; just 12 days ago, a Deutsche Bank poll of 1,000 investors found 83 per cent expected a "Remain" vote.

However, a surge in support for Brexit injected fear aplenty into markets. Sterling and the FTSE tanked, while European indices appeared to be heading for double-digit corrections.

Now, the tide appears to have shifted again, stocks surging yesterday after polls indicated a firming in support for “Remain” in the aftermath of the murder of Labour MP Jo Cox.

While bookmakers’ Brexit odds have receded sharply over the last few days, polls suggest the race remains an open one.

If voters throw caution to the wind, sterling will bear likely bear the brunt of the selling, with a recent Bloomberg poll of economists indicating the pound could sink to a 30-year low.

On the other hand, market nerves have been sufficiently rattled that a "Remain" vote should trigger a sizable bounce. Barclays last week estimated there has been $140 billion in Brexit-related outflows; much of that cash should make its way back into equities if the UK opts to stay put.

In short, it’s time to fasten the seat belts.

Is cash really better than stocks in the long term?

Cash can produce better long-term returns than shares, according to new research by BBC Radio 4 Money Box presenter Paul Lewis.

Since 1995, you’d have enjoyed annualised returns of 5 per cent by putting your money into the highest-yielding fixed-rate savings account each year.

A FTSE 100 tracker fund generated annualised returns of 6 per cent after charges, but cash would have won out over most five-year periods.

In fact, cash beat shares over 96 per cent of all 14-year periods, said Lewis, who noted there was a one-in-10 chance of losing money on stocks over nine or 10 years, adding (harshly): “Few advisers know those odds, still less inform their clients of them.”

In reality, there’s nothing “ground-breaking” – the Mirror’s description – about this research.

Firstly, it’s obvious savers can maximise returns if they actively switch accounts annually – no one said otherwise. Secondly, annual index fund fees of 0.1 per cent or less are common today, so the heftier fees of yesteryear are irrelevant.

Thirdly, it’s no secret the FTSE is lower today than it was in 1999 – accordingly, returns over 10- and 15-year periods were bound to be atypically weak (global diversification easily solves this problem).

Fourthly, it’s a bit much to say cash beat stocks in 81 of 84 14-year periods; you cannot treat overlapping monthly observations as independent periods.

Lewis right to advocate savers actively manage their deposits, but cash is never going to be a great long-term play – especially in today’s low-yielding world.

Neil Woodford too nonchalant over Brexit consequences

One investor not worried about Brexit is Neil Woodford, the UK’s most renowned fund manager, who last week reiterated he “could not construct a convincing long-term economic argument that supported either Remain or Leave”.

There is much to be said for sticking with your portfolio and eschewing macroeconomic analysis; countless studies have found little correlation between GDP growth and stock returns.

However, Woodford isn’t saying this; he commissioned Capital Economics to look into the economic implications of Brexit and ultimately concluded “the economy will do what the economy will do”.

Economists think otherwise – a recent Observer Ipsos Mori poll of more than 600 economists found 88 per cent believed Brexit would weaken Britain’s growth prospects over the next five years. That’s remarkable; the old joke that you’ll get 11 opinions if you put 10 economists in a room doesn’t apply in the case of Brexit.

Accordingly, Woodford’s nonchalance over the economic consequences is odd; as Oxford’s Simon Wren-Lewis noted last month, economists’ unanimity leaves little doubt that economic theory and evidence “are strongly pointing in one direction”.

‘Mountain of cash’ could boost mid-term equities bounce

Merrill Lynch’s latest monthly fund manager survey shows that fearful investors have a “mountain of cash”.

Cash levels have hit 5.7 per cent, their highest level since November 2001, when markets were reeling from the shock of 9/11.

Global equity allocations are at four-year lows; risk aversion is also at four-year lows and at levels consistent with recessionary periods, even though global growth and profit expectations are at six-month highs.

Bearish positioning in February, when cash levels hit 5.6 per cent, helped catalyse the furious rally that followed.

Similarly, today's equity allocations mirror those seen at the market bottoms in mid-2010, 2011, and 2012, notes Fat Pitch blogger Urban Carmel.

High cash levels won’t support equities if Britain votes for Brexit, or if doubts over global monetary policies intensify further.

If tensions ease, however, the potential for an intermediate-term bounce is obvious.