FTSE 100 could drop below 5,000 in Brexit, says UBS

Given the risk rally of the last few days, there is significant room for downside in the event of a Leave vote, said UBS strategist Yianos Kontopoulos, noting the possibility the FTSE 100 could drop 21% from current levels to below the 5,000 mark.

He estimated percentage moves in the mid-teens for UK and EU equities but materially smaller moves for the S&P 500 and emerging market equities, and said sterling may come under significant pressure, while the euro will be more stable.

In a Remain scenario, outside European and UK stocks – where a significant relief rally is likely – Kontopoulos expects much less pronounced moves across assets.

“In equities, we think the S&P 500 could reach new highs, albeit near-term no more than 1-3% higher than current levels. Fundamental pressures limit the potential upside in global bond yields. Yields could rise more for core euro-area bonds, which look the most expensive.

“We also see limited upside across EM assets (except perhaps local currency bonds). Interestingly, we believe the potential sell-off in gold in a Remain scenario would be small relative to the upside potential in the opposite case.”

UBS said that in the event of a Leave vote, the FTSE 100 could drop as much as 21% to trade in a range of 4,900 to 5,500, falling below the 5,000 mark for the first time since 2011.

In a Remain scenario, however, the FTSE could gain as much as 9% to 6,800.

Leave estimates for the Euro Stoxx 50 give a range of 2,350 to 2,750, while Remain estimates have it at between 3,025 and 3,500. It is currently trading at 2,978.

As for the S&P 500, it could rally to as much as 2,175 if Britain chooses to stay in the EU, or drop to as low as 1,970 in the event of a Brexit. The S&P 500 closed at 2,089 on Tuesday.