With various commentators, institutions, politicians and investors having differing views on the effects of Brexit, it may feel as though it’s impossible to determine exactly what would happen to share prices if it were to happen. On the one hand, this is perhaps to be expected since Britain leaving the EU would be an unprecedented event and the after-effects of such events are impossible to accurately predict. However, on the other hand, there are perhaps some reasonable assumptions that can be made.
Clearly, the FTSE 100 is an international index. A quick glance at its constituents confirms this, with a large number of them being companies that operate in all four corners of the globe. As a result of this, whether the UK economy grows or shrinks is perhaps not their most important consideration, with markets such as the US and China being far more significant to their long-term success.
Due to this, it could be argued that the FTSE 100 won’t be hurt by Brexit. Companies which rely on the UK to a greater extent (perhaps those in the FTSE 250 or smaller companies, for example) may be hit harder since uncertainty regarding British GDP growth will probably be higher in the event of Brexit. But for most FTSE 100 companies, it may make surprisingly little difference to their performance in the short run.
Furthermore, share prices tend to price-in risk. In other words, if there’s an event on the horizon that could increase risk, then shares will generally trade lower to reflect this. That could be the current situation with the FTSE 100, with the index having fallen by around 5% in the last month. Therefore, while Brexit may cause further weakness, it may already be priced-in to an extent.
Impact worldwide
Of course, the above discussion doesn’t take into account the global economy and the potential effects of Brexit on world GDP growth. Clearly, the EU is performing relatively poorly at the moment from an economic standpoint and if Britain was to leave then the region could see its performance deteriorate.
At a time when the US is raising interest rates and China is enduring a somewhat painful transition towards a consumer-focused economy, this additional disappointment could be enough to send investor sentiment south. In such a scenario the FTSE 100 could see its price level fall as the outlook for global GDP growth becomes increasingly uncertain.
Whether Brexit happens or not, the fact remains that the FTSE 100 faces major risks on a daily basis. An obvious example of this is 9/11, which was a completely unexpected event that caused the index to decline heavily. While such events are thankfully extremely rare, events that cause the FTSE 100 to fall in value do happen and can’t always be foreseen by investors.
As such, investing in the FTSE 100 is inherently risky and capital can be lost at any time. Perhaps the difference with the EU referendum is that it’s a known unknown and even if it does cause the FTSE 100 to shed a large number of points, the index is almost certain to recover – just as it always has.