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Like It or Not; Brexit Referendum is Coming

You’ve likely heard about Brexit by now, and the rhetoric over it is ramping up considerably. In this piece, I’ll give you some tips about how you can play the market in the wake of the historic vote.


 · First, let’s go over what exactly is Brexit

Brexit is an abbreviation of British exit. To decide whether Britain should leave or remain in the European Union, a referendum is being held on Thursday, June 23.
Observers seem equally divided about whether voters will approve the exit, but they are fairly equal over who will be hurt by it.

 · Sectors that could be affected

Jamie Dimon, the CEO and Chairman JPMorgan (NYSE: JPM), said his bank has more than 16,000 employees in Britain. That means that 4,000 workers may have to move from the U.K. That could hurt the British economy, and be a headache for the bank. Other U.S. banks may have to deal with this, and they include Citigroup (NYSE: C) and Morgan Stanley (NYSE: MS)

Banks have already faced global uncertainty, and there are concerns that will increase this week and lead to volatility. Then there is the release of the results of annual stress tests by the Federal Reserves, also on June 23.

Retailers, insurers, other financial sectors and property-related stocks may not be affected as much.

A vote to leave the EU could cost banks billions of dollars, if they lose a key right known as “pass porting,” according to Market Watch.

 · Risk companies

Traders note that companies with high sales exposure to the U.K, like eBay (NYSE: EBAY), Xerox (NYSE:XRX) and Ford (NYSE: F), which gets 18% of its revenues from the U.K.

Bloomberg and J.P. Morgan found that Penske Automotive Group (NYSE: PAG) gets the largest chunk of its revenue from Britain — 33.4%.

Coca-Cola Bottling, which manufactures in the U.K., Abercrombie & Fitch, Gap, Delfy, Invesco, and Walmart are also heavily exposed to Britain and likely to suffer in the event of a Brexit.

 · What if they remain


If Brits vote to leave the EU, government officials will have two years to change their minds. Leaving the EU would shift the U.K.’s trading position to other foreign governments.

This time of uncertainty over whether the Brits will decide to go back (if they exit) is the issue. One of the worst things for the markets is uncertainty. So during this two years in which market players won’t know what Britain will do could be a period of marked volatility.

If the people of Britain vote to remain in the EU, investors should make sure their portfolios are balanced by reestablishing their assets so they are back up to normal levels.

Also, avoid making short-term investing decisions if Brexit becomes reality, and Britain exits the EU. Hold your positions, if you can, for the long-term.

Morgan Stanley pointed out some good issues that investors need to watch out for:

• The bank calculates a 30% probability that Britain will leave the EU. Based on these numbers, the bank sees that numerous assets, seen in the table above, "reflect less risk premium than we think is warranted." In other words, many places are not calculating enough risk into these assets.
• The pound and the euro will be hit on a Leave vote, but even if Britain decides to stay in the EU, there will be only "modest gains." Morgan Stanley expects the pound "to weaken immediately on a vote to Leave, but by year-end we think Euro could weaken even more."
• US equities are a better buy for investors right now.
• The European Central Bank's corporate bond purchase programme has "reduced sensitivity" to a Brexit, and therefore European corporate credit "has the most balanced risk/reward." But the programme hasn't mitigated Brexit risks completely.
• A Leave vote won't make it easy for the Bank of England's Monetary Policy Committee to ease credit conditions for the market.

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