As the result of the EU referendum looms Winterflood Securities has picked the investment trusts that are positioned to benefit from any market rally in a ‘Remain’ vote, and those that will protect against a market slump in a vote to Brexit.
Winterflood says that the uncertain outcome of the EU referendum has meant many investors have sat on the sidelines, not investing, but predicts that once a result is in it will “spur many investors into action regardless of the outcome”.
The Mercantile Investment Trust and Henderson Smaller Companies trust are both positioned to perform well in a ‘Remain’ vote, being exposed to small and mid-cap stocks, which Winterflood expects to see a rally post-vote.
“In the event that the UK votes to remain in the EU, we would expect a relief rally, which arguably has already started, in predominantly UK-focused businesses. As such, we would not be surprised to see a strong short term fillip to mid and small cap companies,” says Simon Elliott, research analyst at Winterflood.
Winterflood cites data from after the 2015 election, which saw the FTSE Small Cap rise by 3.9 per cent, more than the 3.1 per cent rise in the FTSE 250 and the 0.8 per cent drop in the internationally-focused FTSE 100.
For those that want to benefit from a bounce across the board, rather than just in the small and mid-cap space, Winterflood recommends Temple Bar, which is trading on a 7 per cent discount, and Fidelity Special Values, run by Alex Wright.
Europe is also set to benefit in a vote to remain, with Winterflood recommending Jupiter European Opportunities and TR Property, which would both benefit from a bounce in European stocks.
In a Brexit vote, Elliott expects a sell-off in equity markets and a drop in sterling.
“A sizeable stock market crash cannot be discounted but even in the event of a more moderate sell‐off, it seems reasonable to assume that discounts will widen across the investment trust sector,” says Elliott.
Among those investment trusts expected to outperform on a relative basis is Personal Assets, as it is invested in a wide range of assets including equities, index‐linked bonds and gold.
City Merchants High Yield is also set to benefit from any central bank policy changes, which are expected after a Brexit vote, having large exposure to high-yield credit and European issuers.
Investors wanting to take advantage of currency movements post-Brexit could consider Pantheon International, which has exposure to US dollar denominated assets and is already trading at a large discount.
Other trusts to benefit from the fall in sterling include Baillie Gifford Japan and Murray International. BH Macro is also set to benefit from currency volatility, having outperformed in previous times of high volatility, while also having a low correlation to equity markets.