EU referendum – Changes to Nutmeg portfolios

Shaun Port

read 3 min

With the EU referendum just hours away, the latest polls suggest the chances of Britain leaving the EU are 50/50.

With the vote too close to call, and but the possibility of a leave vote, which my team and I believe would have far-reaching consequences for global financial markets, we have implemented our contingency plan to add more protection to portfolios.

What will happen after the vote?

Financial markets hate uncertainty, so a vote to leave would see some big moves in markets even if the actual economic impact was small. A vote to remain would very much maintain the status quo, and we’d be likely to see markets return to some relative stability.

We would expect a big fall in sterling on a leave vote – likely more than 10%.  This could be beneficial for higher risk portfolios which have lots of exposure to the US dollar.  In the first instance, we would expect the UK equity market to fall quite sharply, but also it would be a big shock to European markets and the euro.  Government bonds would perform strongly, as the market would price-in a 100% certainty of a cut in the base rate this year, and start to speculate that rates could actually go negative as they have done in Europe, Sweden, Denmark and Japan.

The likely response to a vote to remain would principally be a stronger pound and, to a small degree, higher equity prices. We do not expect much of a sell-off in bonds given that prices are being driven to a large extent, by international factors.

Changes to Nutmeg portfolios

We invest with a long-term horizon in mind and do not attempt to time swings in the markets but, given the enormity of the decision on 23 June and two very different outcomes, we feel it is prudent to reduce risk in the short-term.

Firstly, we’ve reduced our holdings in equities in Europe and Japan, removed all exposure to the euro and cut holdings in sterling-denominated corporate bonds.

We have not felt the need to reduce UK equities any further, with our exposures already quite low compared to normal.  The UK is already an unloved market and if, as likely, the pound crashes after a leave vote, we expect the UK to be more in favour even with the uncertainty over any future UK trade deals, given that a weak pound will boost profits at international companies.

We do not hold any exposure to mid and small-sized UK companies (the ‘FTSE 250’) which are more exposed to UK growth. The FTSE 250 has underperformed the FTSE 100 by more than 3% this year.

The funds from these sales have been put into increasing cash holdings, adding to holdings in government bonds with a long time to maturity (more than 15 years) and gold.  Long-dated bonds will perform very well if forecasts for UK growth are downgraded and gold prices will rise if the perceived risk in global financial markets goes up.

“Should I change my risk setting?”

A few customers have contacted our support team asking if they should change their risk setting or convert to cash for the next few weeks. At Nutmeg we strongly believe that it is your money and you can do what you like with it, but one of the great things about our discretionary service is that we are here to make these important decisions for you.

One of the principles of good long-term investing is sticking with your fundamental attitude to risk, not acting on shorter-term market events and keeping your long-term goals in mind.

Overall, the measures we have introduced are designed to reduce risk in the event of a leave vote, while not damaging future return prospects.  Once the referendum is out of the way, whichever way it goes, we are likely to make more changes to portfolios.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest.


Shaun Port
Shaun is the chief investment officer at Nutmeg. He has over 25 years’ experience developing and implementing investment strategies for clients ranging from central banks to pension schemes to charities and private individuals. Shaun holds a degree in Mathematical Economics from the University of Birmingham and is a Chartered Alternative Investment Analyst. He can be found tweeting @ShaunPort.

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