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‘Brexit Outcome Divides Opinion’

Robert Orben, a US comedian, once asked the question – “Do you ever get the feeling that the only reason we have elections is to find out if the polls were right?” Certainly, in recent years, the reliability of the polls to accurately reflect a UK voting outcome has been questionable. With the EU referendum under two months away and the polls providing no signs of a definitive winner, Brexit fears weigh on the market. Taking a look at the the odds provided by the nation’s bookmakers, however, shows a high probability of the UK remaining in the EU, which begs the question – has the market over-reacted, misled by unreliable pollsters?

Year to date the majority of Brexit polls have mostly pointed to a tightly run race, a factor that has served to feed overall public and market uncertainty, giving credence to the notion of “Brexit fear”.

Figure 1. Historical average poll performance YTD (as at 25 April)

(Source: Bloomberg, Argonaut Capital Partners)

This is having a potentially detrimental impact upon the activities of a number of businesses. Companies remain cautious going into the referendum and as a result business plans and investments are being deferred in the short term. Austrian based Zumtobel (ZAG AV), a company with 18% UK sales exposure, recently issued a profit warning suggesting a postponement in customer orders on the back of Brexit uncertainty. In addition, large cap UK housebuilders have seen a downturn in share price as investors contemplate the potential for project delays. Brexit fear is also clearly evident in the FX. Since the start of 2016 the pound has been one of the worst performing major currencies this year, hitting a low of £1:€1.235 two weeks ago, down as much as 9%.1

Whilst the currency movement may not be entirely attributable to Brexit fears it is certainly a major contributor – when Boris Johnson declared his Brexit decision the pound fell almost 2%, the biggest one day fall since 2010.2 As the uncertainties surrounding the referendum undermine UK economic growth it is worth considering what the economic consequences of any future result might be.

A win for the Leave campaign would undoubtedly lead to a continuation of the recent trends in the short-term, further sterling depreciation and low levels of investment activity. The requisite negotiations and agreements regarding the form and structure of any future relationship between the UK and the EU would be lengthy and most likely serve to exacerbate fear within the markets, with a very real possibility of the UK slipping into a recession.

In the medium-long term the risks are as yet unproven. The Treasury recently published data that forecasts the potential impact of a Brexit under three trade scenarios: a negotiated bilateral agreement similar to Canada; membership of the European Economic Area (‘EEA’); and reliance on membership of the World Trade Organisation (‘WTO’). Each scenario concludes that the UK would be worse off following a vote for Brexit. Under the least negative scenario, a negotiated bilateral agreement, the Treasury forecasts a fall in UK GDP of 6.2%3 by 2030 and a loss to UK households of £4,300 a year4. The Leave campaign have attacked this data and the supporting assumptions and it certainly has reasonable grounds for pointing out the potential risk for error in forecasting over a period of 15 years. Any consideration of the future impact seems futile at this stage given the scope of possibilities that could arise. If Brexit were to play out, the uncertainties would persist and continue to dominate a market already in distress.

As polling results continue to feed Brexit fears it is worth considering to what extent they are reliable. History has shown that these polls are not always the most reliable sources of information. One needs only look back as far as last year’s election to see how misleading the polls can be in predicting an outcome.

Figure 2. Poll Voting Intention (General Election 2015 & Scottish Referendum 2014)

* mean result of polls taken approx. 1 month before the election/referendum
(Source:, Argonaut)

The Scottish referendum polls also drew a picture of a much closer fight than what eventually took place. Following last year’s general election, reports on the polling error attributed it to unrepresentative sampling. Polling error is exacerbated where the means by which the data is collected is restrictive, who it targets and how it targets them can lead to misrepresentation. For example, online polls are limited in their ability to randomly capture a sample, they tend to reach those who are politically engaged, ignoring the more apolitical voters which can mislead results. Telephone polls have lower response rates and can therefore be restricted on size, also increasing the margin of error. Overall, the large number of unknowns in any given situation cast doubt over the reliability of any poll.

UK bookmakers tell a different story to that of the polls. The odds provided by the likes of Ladbrokes, William Hill and Paddy Power indicate a 74:26 swing in favour of the UK remaining in the EU. The outcome appears more certain for those willing to bet on it.

Figure 3. EU referendum odds - UK Bookmakers (as at 25 April)

(Source: Oddschecker, Argonaut Capital Partners)

Predictions provided by the bookmakers have been relatively accurate in the past. In the build up to the 2014 Scottish Referendum the open market betting platform, Betfair Exchange, had odds that equated to a 79%5 chance of a “No” vote. At the same time, polling tended towards 50:506, unable to definitively provide an expected outcome.

So while the polls remain less certain on the outcome and question marks hang over their reliability, the bookies might be the better bet in terms of calling the outcome. Add to the mix that 9%7 of voters are supposedly undecided and the assumption that these individuals will tend to stick with the status quo and even the polls begin to look weighted to a Remain win.

In the event of a pro-EU result, a positive market reaction would be expected as investors’ fears are allayed, with a reversal of the sterling versus euro trend seen over the past few months. The extent of any bounce back is itself difficult to gauge but given the level that sterling has fallen from in such a short period one would expect a definitive move following the results, a strong rebound in the market might be expected where pent-up demand is subsequently released following a holding period.

Given the recent sterling movement and the potential for further forex volatility, the FP Argonaut Alpha fund has recently added a sterling hedged share class to allow unitholders to protect themselves against adverse FX movements. If the UK votes to remain in the EU, as the bookies currently suggest, strengthening of the pound versus euro weakness appears inevitable. This would therefore be a good opportunity to take advantage of the hedge share class.

Archie Tulloch
Investment Analyst
April 2016

1 Bloomberg
7 Bloomberg

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