Several fund managers speaking at Expert Investor’s investor forums in the past couple of months have claimed Brexit is much less likely to happen than neck-and-neck opinion polls suggest by pointing at the bookmaker’s odds, which were until very recently firmly in favour of a Remain outcome of the upcoming Brexit referendum.
But odds have narrowed considerably over the past two weeks or so, suggesting Brexit is now a much more likely outcome of the vote. Bookmakers were implying a 15% probability of Brexit just several weeks ago, but this has risen to 33% to 43% now, depending on the bookmaker.
However, as it is unlikely that lots of voters have suddenly changed camps in such a short time period, this shift has also impacted bookmakers’ credibility. In fact, their odds should be taken with a large pinch of salt, according to Nikko AM, since “betting odds are largely dictated by weight of money rather than a sophisticated analysis at betting companies themselves”, said Simon Down, senior portfolio manager at Nikko AM.
Follow the money?
Information provided by Ladbrokes, a bookmaker, shows that 84% of bets have been placed on Brexit in the first week of June, compared to just a third in the last week of April. This, rather than any sort of polling efforts, has led to the narrowing of odds observed in recent weeks.
The average Ladbrokes bet for Remain is also about six times the size of the average Leave bet. “The average amount for Remain betting is likely to be heavily biased by a number of very large bets,” said Down.
This implies that the odds could have been driven down to unrealistically low levels by big Remain bets in previous months, while in fact the real possibility of Brexit has always been higher than the bookmakers suggested. So with both bookmakers odds and opinion polls, which failed to predict the outcome of last year’s UK general elections, seeming unreliable, it will be hard to predict the outcome of next week’s referendum.
So perhaps the most dependable guide here is the British national character. As Fred Jeanmaire, a European equity manager at Columbia Threadneedle, put it: “Brexit is a major risk, but in the end the British population is quite conservative, and inclined to stick with the status quo.”