Hedge UK and European equities before EU referendum, says WisdomTree Europe

Apr 8th, 2016 | By | Category: Equities

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Exchange traded fund provider WisdomTree Europe has advised that investors with long positions in UK or European equities may wish to consider hedging their positions ahead of the referendum on Britain’s membership in the European Union (EU).

Hedge UK and European equities before EU referendum, advises ETF provider WisdomTree Europe

WisdomTree Europe believes the uncertainty surrounding Britain’s EU membership will cause UK and European equities to turn bearish in the lead up to the referendum on 23 June 2016.

The firm references the performance of UK and European equity and government bond markets in the lead up to the Greek referendum on EU membership as a proxy for the likely market performance leading up to the ‘Brexit’ referendum on 23 June 2016. The below chart shows the trend in European equities and bonds in the 30 working days leading up to and following the 5 July 2015 “Grexit” referendum. This was the de facto vote by Greece to accept tough austerity in exchange for a bailout, and secure its future membership in the European monetary union.

The graph shows that the trend of risk aversion was evident in both the UK and eurozone, with equity markets weakening and bond markets gaining strength. The FTSE 100 and EURO STOXX 50 fell by approximately 6% in the 30 days leading up to the referendum, and further slides reversed only after the extension of the bailout deadline restored market confidence.

Graph WisdomTree EU Referendum

WisdomTree believes that with no obvious economic upside to Britain leaving the EU, markets will likely turn bearish in similar fashion as before the Greek vote. Furthermore, the firm highlights that elevated volatility levels in sterling, currently on par with levels last seen during the eurozone’s sovereign default and banking crisis in 2010-2011, suggests investor sentiment to the pound is significantly negative.

With polls showing a narrow margin between the two campaigns (a latest YouGov survey gave the ‘In’ campaign a one percentage point lead) uncertainty will remain a key factor,  potentially exposing European equities to downward pressure similar to the “Grexit” period of fear last year. Safe havens, including gilts and gold, are likely to find ongoing appeal with investors.

As a vehicle to hedge existing portfolio exposures, or to actively bet on a decline in broad UK and European markets, investors may wish to consider investing in ETPs that provide leveraged exposure to the inverse performance of broad UK and European equity markets. The Boost FTSE 100 3x Short Daily ETP (3UKS) provides triple the daily inverse return of the FTSE 100 Index. TheBoost FTSE 100 2x Short Daily ETP (2UKS) and theBoost FTSE 100 1x Short Daily ETP (SUK1) are also available, providing double the daily inverse return and the unleveraged daily inverse return on the FTSE 100 Index respectively. The Boost Euro Stoxx 50 3x Short Daily ETP (3EUS), the Boost ShortDAX 3x Daily ETP (3DES)and the Boost Euro Stoxx Banks 3x Short Daily ETP (3BAS) provide triple the daily inverse return of the Euro Stoxx 50, the German DAX, and the Euro Stoxx Banks indices.

WisdomTree also suggests safe-haven assets may outperform in this volatile environment and investors may wish to allocate a portion of assets to tracking the performance of UK Gilts, German Bunds or gold. The Boost Gilts 10Y 3x Leverage Daily ETP (3GIL) and the Boost Gilts 10Y 5x Leverage Daily ETP (5GIL) provide triple and five times the daily performance of 10-year Gilts respectively, while the Boost Bund 10Y 3x Leverage Daily ETP (3BUL) and the Boost Bund 10Y 5x Leverage Daily ETP (5BUL) provide triple and five times the daily performance of 10-year Bunds respectively. Long exposure and long leveraged exposure to the gold price may be obtained from the Boost Gold Daily ETP (GLD), and the Boost Gold 2x Leverage Daily ETP (2GOL) and Boost Gold 3x Leverage Daily ETP (3GOL) respectively.

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