Friday 13 May 2016 4:42 pm

Is the IMF right that a vote to leave the EU would lead to sharp drops in share prices?

Aengus Collins, country forecast director at the Economist Intelligence Unit, says Yes.

Volatility in the UK’s financial markets would unquestionably surge in response to a vote to leave the European Union. Although the medium-term economic impact wouldn’t necessarily be dramatically worse than the baseline, the immediate aftermath of a leave vote would potentially be brutal. The global backdrop is already inauspicious, with the latest EPFR fund-flows data suggesting that investors are getting jittery. Add to that the profound uncertainty that a leave vote would trigger, and a hammering for UK markets looks inevitable, with sterling leading the fall. We are hearing a lot at the moment about the financial and economic implications that a leave vote would have, but it’s important to stress that the country would also face a political crisis, which would only serve to compound market nervousness. Divisions within government would be deepened and there would be real questions as to who would now enjoy the moral authority to lead the country. Against this backdrop, yes, equity prices would fall.

Jason Hollands, managing director of Tilney Bestinvest, says No.

While a leave vote might well result in an initial knee-jerk reaction for equities, that in itself should not panic long-term investors in UK listed shares and it shouldn’t drive a decision about the long-term future of the country. While there undoubtedly will be specific companies more exposed to increased uncertainty ahead of securing a new trade deal, and whose shares will already reflect this anxiety, the London market is global. The UK equity market is not a simple proxy for the UK domestic economy. Over two thirds of the earnings of FTSE 100 firms are derived outside of the UK, with considerable exposure to Asia and emerging markets. Share prices will settle down to reflect the robustness of these businesses and where they make their earnings. In fact, as there is a broad consensus that an out vote will drive sterling weaker, this may actually provide a short-term fillip to domestic investors in UK equities as they benefit from the impact of dollar earnings being translated back into UK dividends.

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