The UK equity market seems to have taken the view that the biggest losers from a Brexit would primarily be those stocks and sectors that have the highest proportion of domestic earnings, writes Miton's Eric Moore.
So, in the first quarter of this year there was notable weakness in house builders (Bellway), property stocks (Land Securities), domestic banks (Lloyds) and domestic consumer stocks (ITV).
Many of these stocks featured in 'Brexit baskets' created by investment banks, offered as vehicles to short (or sell) to benefit from increasing market anxiety around Brexit.
This approach may be a little simplistic. The biggest losers from Brexit are more likely to be those companies that have benefitted from increased standardisation, harmonisation and trade across Europe such as pharmaceuticals or electronics.
The polls have recently given the remain camp a lead again, and the betting markets, which have proved to be more accurate than the pollsters in predicting recent political events like the Scottish referendum and the last general election, also see the risk of Brexit as relatively small.
So far in May, domestically orientated stocks have started to recover their losses. Some of this is presumably accelerated by the trades within the 'Brexit baskets' being unwound. This means that anyone looking for a Brexit bounce come 24 June, may find it is already in the price.
Another Brexit play has been the price of the British currency, sterling. This has traded in a similar pattern: distinct weakness in the first quarter as perceived Brexit risk increased, but has recovered some of its losses so far in the second quarter.
There are good reasons for sterling to be weak quite irrespective of Brexit: the twin deficits continue to grow. The UK runs a material current account deficit and a growing fiscal deficit, so in effect, the nation is borrowing from foreigners to finance the purchase of foreign made goods.
This has got to be bad for the currency, so again anyone hoping for a bounce on the back of a 'Bremain' vote is likely to be disappointed.
Eric Moore is manager of the Miton Income fund
Bull Points
• The forthcoming Brexit vote has caused rotation in markets, but nothing worse
• Markets are now reflecting a view that a Brexit is unlikely. This chimes with the betting markets
Bear Points
• Any bounce in assets from a vote to remain is likely to be already priced-in by June
• The outlook for sterling is poor, with or without Brexit
