ETF Securities Research Blog

EU Referendum: investors vs. gamblers.

According to some recent polling evidence, the British public has now turned toward voting to leave the European Union. We look at what investors and gamblers are really thinking…we follow the money.

Following the real money seems like a better predictor of the referendum result than extrapolating surveys when the ‘don’t know’ voters (of which there is around 10% of polling surveys) have such a significant impact on the final outcome. Although the FT reports that the ‘Leave’ camp has the upper hand over the ‘Remain’ camp (by 3 percentage points on average), the ‘don’t knows’ are critical to the result and evidence suggests they tend toward the status quo.

Investors vs. gamblers.

Gambling flows on betting website Betfair indicates that the vast majority (around 80% of gambling funds) are betting on Britain remaining inside the EU. Somewhat counter-intuitively, this is in contrast to investor flows into ETPs, which shows that 85% of total British Pound ETP funds are being deposited into products tracking short GBP positions. Although not strictly comparable, investment flows are showing a distinctly counter trend from gambling. We feel that the difference represents investors hedging potential losses in other asset classes that could be sustained if the referendum were to go the way of the ‘leave’ camp. Investment hedging is pragmatic and does not represent a underlying view that that Britain will leave the EU, in our opinion.

gbplong short flows

That being said, our base case remains that Britain will vote to remain inside the EU and that such a result is a positive one for the UK economy and the British Pound in the long run. Nonetheless, volatility has reached new extremes for GBP currency crosses. Elevated volatility levels of GBP opens up buying opportunities in the medium term as uncertainty fades.

gbp implied vol

Historically, steep falls in the Pound have presaged strong rebounds. The subsidence of volatility following the financial crisis and the Scottish referendum, led to strong gains for GBP against the Euro and JPY. With GBP being battered by the uncertainty surrounding the ebb and flow of sentiment following polling survey results, we see attractive value in the Pound, especially against the Euro and Yen, in the final lead-up to the June 23rd vote.