WisdomTree Europe: 2015 Grexit episode suggests to stay hedged until ‘B’-Day
In the second instalment of our ‘Britin’ or ‘Brexit’ series, we look at the key issues in the run-up to the Referendum. View ‘Britin’ or ‘Brexit’? : In a nutshell’ for last week’s high level analysis.
The markets don’t like Britain flirting with the status quo. When there is no obvious economic upside and only uncertainty, markets turn bearish. The elevated volatility in sterling which, at 12%, is on par with levels last seen during the Eurozone’s sovereign default and banking crisis in 2010-2011, suggests investor sentiment to the pound is outright downbeat currently.
Chart 1 shows the trend in European equities and bonds in the 30 working days leading up to and following the 5 July 2015 “Grexit” referendum. This was the de facto vote by Greece to accept tough austerity in exchange for a bailout, and secure its future membership in the EMU. While not directly comparable to “Brexit”, it is in our view the closest reference for how markets may potentially react leading up to 23 June, the date when Britain’s future membership in the EU is put to a referendum.
In the run-up to the vote and the real possibility of “Grexit”, a trend of risk aversion was evident in both the UK and Eurozone, with equity markets weakening and bond markets gaining strength. The FTSE 100 and EURO STOXX 50 fell by approximately 6% in the 30 days leading up to the referendum, and further slides reversed only after the extension of the bailout deadline restored market confidence.
Past performance is not indicative of future returns
How does this compare to Britain’s experience now? As polls continue to gravitate around a near even split as to whether Britain stays in or out of the EU, the spectre of uncertainty will loom large, potentially exposing European equities to downward pressure similar to the “Grexit” period of fear last year. Safe havens, including gilts and gold, are likely to find ongoing appeal with investors.
Amidst a vulnerable sterling and euro, it may be prudent to hedge long UK and broad European equity market exposure.