Amid the worries about the financial impact of a potential British vote to leave the European Union on June 23, what would the effect be on institutional investors such as pension funds with investments there?
“The initial reaction to this is bigger than the longer-term effect,” says Leo de Bever, former chief executive officer of the Alberta Investment Management Corp. “The economic system is resilient, and even if people do silly things, it tends to adjust.”
A majority of global investors agree that a vote to leave will cause an instant slump in British asset values, according to a survey by the CFA Institute that surveyed 1,750 global investment professionals earlier this month. In the event of a vote to leave, 81 per cent of respondents expect a fall in Britain’s stock market, while 39 per cent expect a sharp decline.
Read: How would Brexit impact the financial industry?
“You can see the potential of a 10 per cent decline in global equity markets,” says Charles Lannon, senior vice-president and head of global equity mandates at Cidel Asset Management.
There would likely be a drop in commodities and the value of the British pound as well as a wider spread in high-yield bonds, he adds, suggesting that, in turn, U.S., Swiss, and German bonds and foreign currencies would increase in value.
However, he expects the situation to quickly turn around. “Even if the U.K. does vote to exit, all this volatility will reverse in 12 to 16 weeks.”
While experts believe capital markets will suffer the majority of the blow, some institutional investors such as pension funds that have sizeable investments in British infrastructure and real assets have been reluctant to invest further in the country, according to Reuters, which reported earlier this year that some of Canada’s largest players have postponed investment deals until the vote.
However, de Bever says investors’ hesitance is futile because a vote to leave won’t cause significantly affect returns from real estate.
“If you own an airport and toll road, there may be some effect, but it won’t be traumatic,” he says. “The expected return of an overall asset is eight or nine per cent. You might lose half a per cent or one per cent.”
Read: Brexit vote creates buying opportunity for U.K. companies
The fallout may have a greater effect on commercial properties that house small- to medium-sized businesses than on residential properties, according to Kurt Reiman, BlackRock’s chief investment strategist for Canada. If businesses from other European countries repatriate their investments, commercial properties could see higher vacancy rates and reduced valuations, he says.
But a vote to leave Europe could provide opportunities for investors that see long-term opportunities from the impulse reactions that tend to occur in the face of market volatility, says de Bever. “I think pension funds would, if they saw something that in an international context looked cheap, go in and buy.”
On the opposite side, there’s also a chance to capitalize on some of the positive impacts if Britain decides to stay in the bloc, says Reiman.
While the looming referendum has put a damper on Britain’s economy, a vote to stay in the European Union may release the pent-up demand that has been festering among consumers and result in positive gains for stocks and corporate bonds, he suggests.