Brexit — The Known Unknowns

Date Published: 14 June 2016

Category: Brexit

It is often smart to be contrarian and oppose the herd mentality when fundamentals become mis-priced as a result of excessive fear or greed.

Sometimes markets are effectively paying you to act one way as the probabilities are skewed in your favour.  There are not many consistently successful professional sports’ betters but the ones I have met or read about seem to dispassionately look at the bookies odds and dispassionately compare these with their own perceived odds. The commonality appears to be that when there is a substantial difference they deal, when there isn’t they don’t.

Is the Brexit uncertainty one of those occasions, or one of the occasions when to deal on a result which is extremely uncertain, and which then produce an outcome, in terms of likely precise market impacts, that is even more uncertain? Remember the recent UK election and the success of the polls?

In terms of referenda, there is a lack of data to help pollsters as there have only been two UK referenda: the first on membership of the European Economic Community in 1975, and the second on adopting the Alternative vote system in parliamentary elections in 2011.

What do the bookies say the odds of Brexit are?

The ‘Oddschecker Average Probability of BREXIT Implied from Betting Odds’ Index is based on bookmaker quotes.

At the close on Monday 13 June 2016 what were the bookie odds? — remembering this is after the shock poll of 10th June for The Independent that revealed voting intentions of 55% Brexit, 45% Bremain and various other polls overnight that have also put Brexit in the lead.


Source: Bloomberg

What would be the Impact in the very short term of a Brexit or Bremain vote?

This is an unknown known and there are plenty of different forecasts in the market.  However, by looking at the impact of last Friday’s ‘shock’ poll that indicated Brexit was ahead by 55% to 45%, we can reasonably estimate how different markets will fare.


I have discounted the pro-rata movements to the Friday shock poll in the analysis above by 50% to allow for the initial shock factor of this poll result, thereby magnifying market movements, and to allow for an impact of various central bank policy announcements / interventions which would be announced were there to be a Brexit.

As at 10.02am on Tuesday 14th June, the FTSE 100 was 5966.25 which based on our Brexit / Bremain assumption of either 5,513 or 6,371 respectively, would imply that the markets are now discounting a 47% chance of Brexit winning.  

The latest Oddschecker implied probability of Brexit is 44% so currently markets are probably slightly over-estimating the bookies implied odds of us leaving.

Most importantly, whilst nothing is guaranteed or 100% predictable in life or markets, the final poll result and the final poll impact in markets are wholly unpredictable.  We also do not know exactly what actions might be taken by Central Banks were there to be a Brexit or how markets would then take such announcements.

To paraphrase, the ex US Secretary of Defence, Donald Rumsfeld, to deal on “known unknowns” might be sensible, to deal on “unknown knowns” madness.

Alan Miller — CIO, SCM

Tel: 020 7838 8650

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