Result of referendum far from a foregone conclusion due to high number of undecideds, HSBC says

The result of the referendum on the country’s membership of the European Union was far from a foregone conclusion and even a vote to ‘Remain’ would not lift all of the uncertainties hanging over the future of the EU, one of the UK’s top-rated equity research team said.

A ‘Leave’ scenario was a major risk for European equity markets and would see investors question the sustainability of the entire European project, HSBC said.

However, even a vote to ‘Remain’ was likely to only see a muted relief bounce – and not a sustained ‘rally’ – “because political uncertainty remained high in Europe and economic growth remained lacklustre”, analysts Robert Parkes, Ruhell Amin and Daniel Grosvenor said in a research note sent to clients on 22 June.

What’s more, the analysts said, the situation remained “highly uncertain” given how many voters remained undecided – an average of 13% based on the last five polls.

From a purely stock-market point of view, ‘Remain’ would see the MSCI Europe index stage a “muted” relief rally of less than 5%, led by gains in higher Beta/periphery countries and financials (ex-real estate).

That forecast was in part based on the fact that the market was already trading on a forward price-to-earnings multiple (I/B/E/S data) of 14.6 versus a 10-year average value of 12.0, although the average price-to-book value of 1.6 was in-line with its historical average.

Should Britons choose ‘Leave’, that would open up “significant” downside risk, with the MSCI Europe equity benchmark initially falling by between 10.0% to 15.0%, with all stocks sharply lower.

Nonetheless, Switzerland, the UK and the “purer” defensive sectors, such as food&beverages, household products, pharmaceuticals and sectors with exposure to emerging markets (among the cyclicals) could be expected to outperform in a Brexit scenario (falling less than the benchmark, that is).

Among the sectors which had been exhibiting the greatest upside during “big” moves lower in the probability of a ‘Remain’ vote over the last three months were Banks, Diversified financials, Insurance, Capital goods and Automobiles.

Conversely, during episodes of big increases in the probability of a ‘Remain’ it was Consumer services, Food&beverages, Media, Household products, Real Estate and Telecommunications which had tended to experience the largest falls.

"Even once the UK referendum is out of the way, there are plenty of political hurdles to overcome in Europe over the next 18 months. The re-run of the Spanish general election takes place on 26 June, only three days after the UK referendum. The Italian constitutional referendum is in October and, further ahead, the French presidential election takes place in Q2 2017 and the German federal election in H2 2017. Meanwhile, lurking in the background, we are seeing a general rise in support for Eurosceptic fringe parties throughout Europe."