With less than four months to go until the referendum on Britains membership of the EU, the outlook for the FTSE 100 is uncertain because were entering uncharted territory. The outcome of the vote seems likely to be very close and this has the potential to cause weaker investor sentiment in the coming months.
Soit seems likely that the FTSE 100s performance will be held back between now and referendum day. After all, this could be one of the biggest decisions (both politically and economically) forthe British people in recent decades and its likely to have a huge impact on the domestic economy.
Investors considering buying shares in FTSE 100 companies may decide to hold off for a few months to see what the result is. Similarly, investors nervous about the outlook for the global economy may see the prospect of a Brexit as confirmation that now isnt the right time to be holding shares and may seek the relative safety of cash or a supposed store of wealth such as gold.
Bulls and bears
As mentioned, uncertainty is likely to be a key theme between now and the vote, so a major bull run seems unlikely (although it can never be ruled out). And if Britain does decide to leave the EU, then its very much a case of all bets are off. In other words, what happens to the FTSE 100 and the economy on Britains exit is difficult to predict since it would be unique.
Clearly, both sides of the debate are quoting various figures for employment levels, business relocation (or lack of) and GDP levels thatthey say would be impacted by Britain leaving or staying. Whether these are accurate or not is up for debate, but when it comes to the FTSE 100, none of this may be all that relevant.
Thats because the FTSE 100 is a truly international index thats far less reliant on the performance of the UK economy than on the global outlook. Afall or rise in employment levels, GDP or in multinationals located in the UK is unlikely to have a major impact on FTSE 100 earnings since its constituents are geographically diversified. And while the UK economy matters greatly to Britons, the US and China remain the major players when it comes to global economic growth.
The caveat to that viewpoint, however, is the performance of the EU economy itself. If Britain were to leave then theres a chance the EU would offer worse long-term growth prospects than currently. Why? As the fifth largest global economy, Britain has a positive overall impact on EU trade and economic activity. Without Britain as a member, its possible for the EU to suffer from a similar kind of uncertainty as Britain would do on a Brexit, which could meana worsening macroeconomic outlook. This would be bad news for the global economy and for the FTSE 100 too.
Of course, history tells us that Britain and the FTSE 100 have endured greater challenges than the question of EU membership. With share prices being low, any further discount could represent an even better time to buy quality stocks for the long term. While their performance may be volatile in the short run, longer term,the UK, EU and world will continue to grow even if trading blocs and political unions change, fade and ultimately disappear.