The highly-anticipated and highly-feared U.K. “Brexit” vote on June 23 is now just days away. Rather than falling victim to irrational fear about the outcome, now is the time to set up some pre-vote pair trades involving British stocks Barclays (BCS), Vodafone Group (VOD) and BP (BP).
What Would the Brexit Fallout Look Like?
Fear is quite possibly the strongest motivator when it comes to the emotions of trading. Global equity markets will likely get pounded if the U.K. votes to leave the E.U. this week.
How bad could it get? Risk-modeling company Axioma projects that British equities would fall 24% within three months in the event of a “leave” vote.
The Economist Intelligence Unit projects that the pound would fall 14-15% against the dollar within a year of a “yes” vote, the U.K. economy would shrink 1% in 2017, London would lose its status as a global financial center and the U.K. economy would end up 6% smaller by 2020 than it would have been.
Those projections are certainly scary.
What Are The Brexit Polls Saying?
British stocks have sold off hard this year, so the market fear of a Brexit is certainly real.
Depending on which poll you choose to trust, it appears as if the vote could go either way. A recent NatCen poll found 51% of voters in favor of “stay.”
An Ipsos MORI poll on Thursday found 53% of Brits in favor of “leave.”
The latest Survation/IG telephone poll also gives the “leave” vote the edge, with 45% in favor of a Brexit, 42% in favor of staying in the E.U. and the remainder undecided.
What Are The Actual Odds Of A Brexit?
The bookies in Britain are all still betting that the “stay“ vote will win out. As of June 15, British bookies, including Coral, SkyBet, BoyleSports, 888sport, Bet365, BetVictor and a number of others are unanimously predicting that the “stay” vote wins out. Odds for “stay” bets range from 1-2 up to 4-7.
In addition, Bloomberg’s official Brexit Tracker now puts the chances of a “leave” vote at only 42%.
Here’s my two cents: without knowing the minutiae of British politics, I know two things about human nature: 1) Traders tend to fear the unknown more than actual bad news, and 2) Many voters that remain undecided until the last minute, especially when their actual jobs, families and financial security are at risk, will likely opt for the status quo.
So if British voters choose to stay, many U.K. stocks will likely surge on a relief rally. However, there is very real risk of downside if voters choose a Brexit. By pairing U.K. stocks with their U.S. analogs, traders can hedge their bets that U.K. voters will choose to stay. Here are three suggestions:
Long Barclays (BCS)/Short JPMorgan Chase (JPM)
BCS is down 25% this year in anticipation of the Brexit vote, while JPM is down about 6%. Expect similar positive returns if the U.K. votes to stay.
Long Vodafone Group (VOD)/Short Verizon Communications (VZ)
VZ stock is up 15% in 2016 while VOD stock is down 4%. VOD holds roughly 18% of the U.K. mobile market share.
Long BP/Short ExxonMobil (XOM)
Even with an oil price recovery in 2016, BP stock has lagged XOM and Chevron (CVX) due to Brexit fears. Expect much of that divergence to be corrected if the U.K. votes to stay.
Ad of course, if you disagree with my opinion that U.K. voters will choose to stay, the three pair trade hedges will work the exact same way if you reverse the short and long positions.
Disclosure: As of this writing, Wayne Duggan had no positions in any of the stocks mentioned.