When it comes to casting votes in the EU referendum on June 23, for most people it will come down to money.
Will their mortgage repayments be higher or lower? Will pensions and other investments rise or fall? What will happen to the value of sterling and the cost of their holidays overseas?
Unfortunately there are no certain answers to these questions, only a great deal of sound and fury.
The AA warned that family fuel bills would rise by £500 a year. Amber Rudd, the Energy Secretary, said energy costs could soar.
Sterling will collapse by 20pc according to analysts at Goldman Sachs, while stock markets are tipped to slide by up to 30pc, savaging pension and Isa investments.
But is the gloom overdone? Jason Hollands, a spokesman for the investment adviser Tilney Bestinvest, believes so.
He said: “The UK stock market is dominated by large international companies, whose performance is not closely linked to domestic UK issues. Markets don’t like uncertainty and there are real risks around. But the Chinese economy, US interest rates and oil-price movements are more significant risk factors.”
Laith Khalaf, a spokesman for Hargreaves Lansdown, the investment shop, added: “There may be some volatility in the lead-up to the vote. But if you are happy to be invested in the stock market you must be prepared to accept some volatility. If you can’t, then you shouldn’t be invested.
So far there has been little cause to panic. Stock markets have not gone into freefall since the date of the referendum was announced. Quite the reverse.
The FTSE index of Britain’s top 100 companies has risen from 5500 on 11 February and now hovers around 6096.
But investors are cautious. Research from The Share Centre found that a quarter of 1,500 Isa investors quizzed were opting for lower-risk investments, pointing to the uncertainties triggered by the EU referendum as their reason.
But is their caution justified? We examine the risks.
1. Impact on sterling
Sterling has fallen by 12.5pc against the euro, 6.8pc against the US dollar and 11.4pc against the Australian dollar since the debate took off last December. But economists’ expectations that interest rates will stay on hold until the middle of 2017, even if the UK remains in the EU, are also partly responsible for pushing the pound lower.
Peter O’Flanagan, head of foreign exchange at specialist risk firm Clear Treasury, is bracing for a sterling shock if Britain votes to leave the EU. He said: “UK trade will be affected in the short term, because we will have to renegotiate trade deals not only with EU countries but with other countries where we rely on EU trade deals. This will take time. Everything will stabilise in due course, but there could be short-term pain.”
Mr Hollands agreed, saying: “A vote to leave would be accompanied by a knee-jerk further sell-off in sterling. However, this may not be all bad. While it pushes up the cost of foreign holidays, it also makes the UK a cheaper destination for overseas visitors and makes our exports more competitive. There are two sides to every coin.”
2. Will markets fall?
Based on the experience of the Scottish referendum, markets largely ignore the chatter around the vote until the date gets closer or a credible poll shows a change to the status quo.
Billions were wiped off the value of Scottish firms after a YouGov poll predicted a narrow win for the independence campaign.
So what should investors do? Mr Khalaf said they should carry on as usual while making sure their investments were spread globally.
“After the vote, investors will still have the same need to invest for their retirement, for university fees for their children, and for the many other reasons they save now,” he said.
Actively run funds can help minimise any near-term impact with the fund manager fine-tuning portfolios in a way funds that track the market will not be able to.
“Absolute return” funds, in particular, aim to smooth market volatility. They sometimes use “short selling”, betting on falling shares, to achieve real returns each year, although many fail.
Tilney Bestinvest recommends a mix of funds, including some absolute return funds. Its tips include Threadneedle European Select, FP Argonaut Absolute Return fund, JPM Global Macro Opportunities, Threadneedle Dynamic Real Return and Invesco Perpetual Global Targeted Returns.
Fundsmith Equity is a favourite pick for a number of advisers, including The Share Centre, which also tips Woodford Equity Income and Old Mutual Global Equity Absolute Return.
Nicolas Ziegelasch, head of equity research at Killik & Co, the stockbroker, stressed the need to internationalise a portfolio. He said: “We are not encouraging investors with global portfolios to significantly change exposure to the UK, but rather just to remind investors who are solely exposed to the UK that there are a number of benefits to international diversification, especially in this time of high currency volatility.”
For US exposure, Killik recommends Findlay Park American, although this widely praised fund is not widely available.
3. How safe will my money be?
The Financial Services Compensation Scheme (FSCS) protects deposits of up to £75,000 per banking licence and £50,000 at investment and mortgage firms. However, compensation limits are harmonised across the EU.
If the UK voted to leave, it is likely these limits would continue for the time being. But over time they could be higher or lower than elsewhere in Europe.
4. Taxes, Isas and pensions
UK taxes and state pensions are set by the UK Government so no change is anticipated. Isas, too, are an exclusively UK product.
5. How will expats fare?
Expats who rely on UK income such as pensions will be affected by any currency swings. For example, £1,000 would have bought 2,100 Australian dollars last December, but is now worth only A$1,800.
The bigger worry for more than a million pensioners living in Spain is whether their state pensions will continue to be uprated annually.
The UK Government pays annual cost-of-living rises to all pensioners living in European Economic Area countries, so this should continue. But the Government recently made clear it did not intend to enter any new reciprocal agreements, so if a new arrangement was required then the upratings could be at risk.
Original story from The Telegraph