Huge Cash Piles Poised to Boost Equities Should Brexit Lose

  • Stock funds have been losing money on growing concerns
  • European equities poised to benefit, Natixis and Barclays say

Amid all the murk surrounding Britain’s vote on leaving the European Union, one thing is certain: a lot of cash is piling up just outside the equity market, and having it all come flowing back has the potential to put a charge in stocks.

That’s according to Yves Maillot, head of European equities investment at Natixis Asset Management in Paris. While the U.K.’s decision on European Union membership is not the only overhang that markets are facing, fund managers highlight its potential secession as the biggest tail risk, according to a Bank of America Merrill Lynch Global Research report this week. After the Stoxx Europe 600 Index tumbled to its lowest level since February, investors may see buying opportunities in the aftermath of the referendum.

“A ‘Remain’ vote would definitely trigger a big relief rally in European stocks, and if you hold a significant level of cash then you’ll be in a good position to jump right back in,” said Maillot, who helps oversee 347 billion euros ($390 billion) and said he plans on buying bank shares. “Calling the vote is so uncertain that most people don’t want to make any bets. That’s why everyone is just opting to pull out of the market, at a time when holding cash is actually not a costly hedge against risk because bonds are so expensive.”

While campaigning was halted after the murder of Labour lawmaker Jo Cox, a strong advocate for voting to stay, recent polls have shown a preference for an exit, helping send a gauge of financial market stress to its biggest six-day surge since last year’s August rout. European equities lost almost $1 trillion in about a week, German bunds went negative for the first time ever and gold rallied to near a one-year high.

Cash piles have grown to 5.7 percent -- the highest since 2001 -- from 5.5 percent in May, according to Bank of America’s survey. Stephen Lingard, who manages $7 billion at Franklin Templeton Solutions, is among those who’s been boosting cash holdings, and said he’s planning to invest after next week’s referendum. Barclays Plc estimates that as much as $140 billion is sitting on the sidelines, according to a June 13 note.

Amid 19 weeks of outflows from European equity funds and the second-biggest pullback ever from U.K. stock funds, Barclays says that a big chunk of the cash at hand is likely to go the asset class if Britons choose to remain in the EU and the Federal Reserve holds off raising rates. The U.S. central bank signaled again this week that it will remain patient, and traders aren’t pricing in even odds for any action until after February 2017. Even though U.K. polls are showing a lead for the “Leave” campaign, bookies are signaling there’s a higher probability it will remain in the EU.

Meanwhile, some investors such as Allianz Global Investors’ Harald Sporleder have already started adding to U.K. stock positions and are getting ready to buy more when the dust settles. Britain’s benchmark FTSE 100 Index and the Stoxx 600 already lost more than 4.5 percent this month through Thursday. Both gauges rose on Friday.

“There is fuel for outperformance on a ‘Remain’ vote,” Barclays global equity strategist Keith Parker wrote in the note. “Equities should be the main beneficiary, particularly Europe.”

Before it's here, it's on the Bloomberg Terminal.