The EU referendum could have a major impact on the FTSE 100. Thats because there is a realistic chance that David Cameron will be unable to make much headway with his renegotiation of the terms under which the UK is part of the EU and, as such, a vote to leave the EU may begin to gain momentum in the months ahead.
As such, the FTSE 100 could endure a volatile period and, should the UK eventually leave the EU in 2016/17, all bets are off regarding the short to medium term performance of the FTSE 100. As a result, it could be worth holding a number of high quality, defensive stocks in your portfolio.
Low Beta
Of course, an obvious way to reduce the volatility of your portfolio is to buy low beta stocks. One prime example is Royal Mail (LSE: RMG), which has a beta of just 0.61. This means that for every 1% movement in the price level of the wider index, Royal Mails shares should change by just 0.61%. So, for example, if the FTSE 100 fell by 10%, Royal Mails share price should (in theory) decline by just 6.1%, thereby providing your portfolio with a degree of protection should the FTSE decline from its all-time high.
Defensive Business
Furthermore, owning shares in defensive businesses could be a sound move, since investors tend to flock to them during times of unrest. Two excellent examples are AstraZeneca (LSE: AZN) (NYSE: AZN.US) and Severn Trent (LSE: SVT). Clearly, neither are particularly dependent upon the performance of the UK economy, so fears regarding the macroeconomic outlook for the UK should not hurt their performance. And, with both companies offering excellent yields, too, of 4.3% (AstraZeneca) and 3.7% (Severn Trent), they should provide a satisfactory income return in the meantime.
Growth Potential
It may also be prudent to own shares in companies that are more reliant on faster growing economies for their revenue so that, if UK economic growth does slow, they have only minor exposure to it. For example, Reckitt Benckiser (LSE: RB) has a very diverse geographical spread and is well-positioned to take advantage of the looser monetary policy that is set to become a feature of the Chinese economy over the medium term. As such, whether the UK leaves the EU or not makes only a minor difference to its performance, and this could be reflected in a stronger share price over the medium to long term.
Looking Ahead
Clearly, the future performance of the FTSE 100 is a known unknown. However, the uncertainty regarding the EU referendum is unlikely to have a positive impact on the indexs price level and, as such, it seems prudent to add the likes of AstraZeneca, Royal Mail, Severn Trent and Reckitt Benckiser to your portfolio. All four stocks have bright futures and have a diverse mix of low betas, a lack of reliance on the UK economy, strong income potential, and exposure to the fastest growing economies of the world.
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Peter Stephens owns shares of AstraZeneca and Severn Trent. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
