By James Tanswell 2/3/2016

As Britain's voters prepare to end the hokey-cokey and finally decide if they want to be in or out of the European Union, analysts are already divided on the potential effects on markets of both the vote and the result.

The currency markets have already spoken, with the pound falling and hitting its lowest point against the dollar since September. The problem is that although two obvious factors caused that decline, it's hard to tell yet what the balance between the two is.

As always, market movers hate nothing more than uncertainty and a combination of opinion polls and the division of leading political figures means the result of the referendum may be in more doubt over the next four months than originally thought.

At that same time, the fall may also reflect the fact that a British exit, while still less likely than not, has now become a genuine possibility. That's seen by many economists as a potential negative using the logic that any increased barriers to trade can harm British business by not only making exports harder but by making it harder to source labour and supplies. That philosophy could also mean stocks in both British companies and those European firms which operate heavily in the UK will remain volatile in the coming months.

The combination of uncertainty and inherent negative effects are amplifying market fears of a vote to leave. Economists and analysts have made a variety of arguments for a Brexit having an outcome that is positive, negative or broadly neutral for the UK's economy. The problem is that the negotiating process for life after the EU could take many years, meaning the long-term effects remain uncertain for an extended period.

There's one note of caution for investors planning to proceed on the basis that both the pound and the market for British-based investments will be shaky at least until the referendum. Analysts including Barclays have warned that markets don't yet appear to have reacted to the risks that will arise for other countries, particularly the possibility of the Euro taking a knock if questions arise about the stability of the EU as a whole, including the possibility of debt-hit countries quitting both the union and the currency.

The UK EU referendum is bound to split opinion throughout the populace however, much like UK Income manager Neil Woodford, we believe that it is hard to see any credible evidence to support either staying or leaving. Because of this there are only a few things we can be relatively sure of;

Pre Referendum

There will be an increase in volatility leading up to the 23rd June. This is not just UK Market volatility, but Currency fluctuations and wider EU market volatility as the effects of a possible Brexit are considered. These periods of overreaction and volatility offer up good investment opportunities and a weak sentiment does not necessarily mean fundamentals have changed.

There will be winners and losers. A weaker currency may be seen as negative to domestic importers but from an economic perspective a weakening currency makes our exports more competitive and therefore would be a positive for the UK Economy. There is as much to fear right now from the Brexit talks bringing down the Euro at the same time as Sterling; its cable and the Euro/Dollar that are arguably a better gauge of any potential fallout.

Post Referendum

No matter the result, the effects on the underlying companies and therefore, investments generally, are likely to be muted. After all, the status of the UK's EU position does not affect that many companies directly, and a good company does not become a bad company over night. It is also important to point out that the UK market is particularly international in nature.

A point worth making is that the referendum should probably not be seen as a simple win-lose barometer for either camp. An establishment-backed status quo campaign probably needs to win by a sizeable margin to declare victory and to consider the Brexit debate settled once and for all (well a few years anyway).

In summary, our stance is to continue to aim for outperformance on a relative
basis and remain invested in what could be a troubling but not apocalyptic UK investment environment.

This article is for information purposes only and does not constitute advice and should not be relied upon to make investment decisions. If you are unsure, you should seek professional independent financial advice. You should note that past performance is not necessarily a guide to future returns. The value of units and the income from them may fall as well as rise. Investors may not get back the amount originally invested.