UK asset management firm warns instability in financial markets

The result of the UK referendum on continued membership of the European Union (EU) is highly uncertain and there will be instability in the financial markets in the run-up to the vote on June 23, according to BlackRock, an investment management corporation, on Tuesday.

"The outcome of the UK Brexit referendum looks highly uncertain, and we expect far-reaching market implications in the short term," said Richard Turnill, global chief investment strategist of BlackRock, in a briefing note.

Turnill said that BlackRock now rated the EU referendum as a "major risk for global markets," and that if the UK voted to leave it would result in global risk assets being vulnerable.

Statistics on Monday from Sporting Index, a UK betting firm, showed an increase in bets on a Brexit over the weekend and Turnill said that betting markets now imply a 27 percent chance of the UK quitting the EU.

If there was a Brexit vote then UK and other European assets would bear the brunt, and sterling could "drop significantly," said Turnill.

UK equities, especially small- and mid-cap stocks would decline, under this scenario, and BlackRock advised that UK investors should consider putting in hedges against a Brexit outcome.

"Peripheral European assets and the global financials and materials equity sectors would be particularly exposed, our stress-test analysis shows. Political risk could also rise amid uncertainty over the succession to British prime minister David Cameron. Safe-haven investments would benefit, we believe," said Turnill.

A leave vote would be likely to shock global markets, and risk assets - including stocks and credit - would suffer in the resulting risk-off environment, as concerns about political instability and a reversing globalization trend would lead to higher risk premiums.

However, if the UK voted to remain in the EU then BlackRock forecast a rally in sterling and a boost for risk assets. Endit