Brexit Campaign Enters The Final Stretch

by: Elephant Analytics


Polls indicate a very tight race in the EU referendum campaign. Conventional wisdom suggests this is good for the "Remain" side as undecideds may go more heavily to "Remain".

"Remain" probably does have a modest advantage right now. However, the markets appear to be pricing in too high a probability of a "Remain" vote.

Referendums are prone to a lot of decision switching, much more so than in general elections.

As well, there appears to be less fear of Brexit consequences than with the Scottish referendum.

Thus, with the markets mostly expecting a "Remain" vote, the significant potential for a surprise may offer opportunities for small "Leave" bets.

The EU referendum campaign is finishing up and polls still indicate a tight race. Support for "Leave" has gone down slightly, resulting in a virtual tie with "Remain" in the polls. Conventional wisdom suggests that this is good for "Remain" as the majority of the undecided voters are expected to go for the status quo in the end. This could result in "Remain" winning by a few percentage points. However, referendum voting tends to be much more volatile than general election voting and there is a greater possibility of an unexpected result than with something like the US Presidential elections. This has led me to make some small bets on a "Leave" result.

Leave Support Falls Slightly

After flirting with the 50% mark in a number of polls last week, the average "Leave" support in the polls appears to have fallen back to around 44%, with "Remain" at around the same level and the remaining 12% of voters undecided. This puts the "Leave" support in the polls a bit behind the "Yes" vote in the 1995 Quebec sovereignty referendum. In that referendum, the "Yes" vote had around 47% support in the final polls with 11% undecided. The "Yes" side ended up falling just short of winning with 49.4% of the vote. A similar distribution of undecided voters would result in "Leave" ending up with around 47% to 48% of the vote.

High Amount Of Uncertainty

Academics at the London School of Economics did a study that indicated that referendums tend to have a high amount of voters that decide their vote or change their voting intention at the last minute. As much as 30% of voters may change their voting intention or decide on their vote in the last week before the EU referendum, including 15% who may decide on the June 23 polling day. A recent June 16 poll had similar findings that indicated that around 20% of surveyed voters said they may still change their minds.

Referendums are said to have a higher amount of uncertainty than general elections as voters do not have entrenched party loyalties. Thus, there is more potential for last minute switching or decisions. Conventional wisdom suggests that undecided voters will typically vote for the safety of the status quo, however, other polling also suggests that the fear of Brexit consequences is lower than that of the Scottish referendum consequences. This could lead fewer undecideds to go for "Remain" than expected.

As well, polls are not 100% accurate either, so when allowing for the margin of error inherent in the polls, there shouldn't be more than very modest confidence in a "Remain" result.


If I was given even betting odds on the referendum, I would place my bet on "Remain" as I believe that it is more likely to win than not. However, the referendum race is still very close and the markets seem to becoming quite confident about a "Remain" win. I think the markets are pricing in too much of a chance of a "Remain" win. Therefore I have purchased a small amount of put options in various stocks that would likely decline if "Leave" wins. The amounts are small since there still is a good chance that "Remain" wins. However, given that the markets appear to be expecting a "Remain" win now (too confident in my opinion), a bet on "Leave" could produce strong returns.

For example the Royal Bank Of Scotland (NYSE:RBS) has $7 July put options trading for around $0.40 each. Its stock previous fell to around $6 when "Leave" took the lead in the polls and Brexit fears rose.

An actual "Leave" victory could conceivably push the stock down to $5. Therefore if the chance of a "Leave" victory is greater than 20%, the expected value of the put option would be greater than its initial cost.

Other banking stocks that may be affected include Barclays (BCG) and Lloyds (NYSE:LYG). Some potential ETFs that may be affected include EWU, FKU, DXPS, DBUK, QGBR,HEWU and FXB.


Based on the most recent polls, it appears that the "Remain" side has a modest advantage if the undecided voters are primarily allocated to it. However, the result is still very much in doubt and I think the chances of a "Leave" result is probably closer to 40%. The referendum is close enough to say that nobody should be confident about a particular result. With stocks such as the Royal Bank of Scotland rallying 20% over the last week though, the market appears to be fairly confident about a "Remain" vote though. This appears to make the potential opportunity for "Leave" related bets greater.

Disclosure: I am/we are short RBS, LYG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.