It is not my intention to express a political view with this post, I am not going to talk about immigration (I feel I can't really have a say on that one), nor will I talk about what is best for the UK economy.
I'll simply try to be as objective as it is possible for an Italian investor living in the UK and try to understand what the impact might be on my portfolio.
Before we start, please allow me to say that I am undeniably a bit scared by the outcome of all of this. As a European citizen living in Great Britain, my future is at stake and I won't even get a chance to officially express my idea through my vote.
But let's get started with the analysis. As an investor, I realise that this event will be the main catalyst of change for years to come and, possibly, great opportunities. There are clearly two main scenarios depending on the vote result.
Scenario 1. The UK ends up voting to leave the EU.
Uncertainty about the financial future of the nation and about foreign investments - which may be blocked as a result of the vote - will cause the GBP (£) to take the hit, dropping to all time low against the Euro. Forecast is in fact it will get close to parity with the Euro, or even lower.
This is bad in terms of purchasing power relative to European goods; however I can see a little positive as I could take some of my savings in € and finally convert them in £ at a great exchange rate.
Also, my dividend income generated by US and European stocks will benefit from a weaker pound.
If the drop of the British Pound were substantial, then it is safe to assume that the British stocks would become more attractive to foreign investors. This would cause the UK shares to gain as a consequence of increased buying activity in the market.
It is exactly in this view that I have recently increased the exposure of my portfolio to UK stocks. I consider it a way to reduce my risk in this moment of uncertainty.
In real terms I would also end up with greater passive income, but reduced level of currency strength when purchasing foreign shares. Because of this artificial "uncompetitiveness" I may be forced to stop the pursue of my 2016 passive income objectives for some time, as I would be unable to keep adding European or American stocks to my portfolio while, at the same time, I would witness the rise of the UK stocks to all time high prices.
I believe indeed that in such scenario it would be wiser to start building a cash position and wait for more favourable market conditions to present.
Scenario 2. The UK ends up voting to stay in EU.
The British pound will start recovering its strength against Euro and US Dollar. This will mean lower passive income from dividends when measuring it in pounds. Opposite to the previous situation, stronger GBP means cheaper US and European shares, which would allow me to keep investing in great companies around the globe.
Although lower passive income from dividends (as a consequence of 'STAY' vote) would be very likely, the long term benefit of this choice would be far greater. Remember I have just started my journey, I would be happy to sacrifice short term returns for long terms growth and stability. So I would accept lower passive income in the immediate future to have a stronger pound which would make foreign stocks cheaper in real terms.
Based on the above and keeping in mind that I am not yet generating a high passive income right now, I see more benefit in scenario 2, that is to say if the UK decides to STAY in Europe. This would allow me to keep investing in high quality foreign/British stocks over the course of the next months and keep accumulating great positions in my portfolio.
As I mentioned previously, the above are the two main predictable outcomes. Reality may fall in between and the number of possible different outcomes is endless. I hope you'll appreciate, however, that the two above simulations represent a good indication of the overall impact of this important decision on my investment strategy.
Please note this is my personal view when looking at my portfolio of investments. I does not mean I am giving any recommendation on the vote for the referendum. I have good faith the good people here will end up deciding what's best for this great country.
Yours,
The Gentleman Investor
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