Brexit baffled punters, pundits and fund managers to the very end

Sat Jun 25, 2016 3:48am EDT
 
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By Tim McLaughlin

BOSTON (Reuters) - Nearly everyone, from London gamblers to U.S. money managers got it wrong. Britain's vote to leave the European Union shocked pundits, investors and politicians alike, underscoring the inherent difficulty of forecasting such rare events.

   On PredictIt, an online political events betting site operated by Victoria University in Wellington, New Zealand and U.S.-based partners, bettors had the probability of a “leave” camp win at just 16 percent on Thursday as British polls closed. Within four hours of the vote count, that had shot to 90 percent.

   The dramatic reversal caught many investors flat footed and showed how they have trouble hedging against such shocks even with the help of such tools as exchange-traded funds or computer algorithms designed to capture an electorate's social media vibe, economists, pollsters and fund managers said on Friday.

Predicting the outcome of Thursday's referendum was harder than that of a national election because there was virtually no historical data to draw on, said David Rothschild, an economist at Microsoft Research. He said pollsters also did not pay enough attention to working class and less educated voters.

The city of Sunderland, for example, home to Britain's largest car factory and considered a bellwether of the sentiment among blue-collar voters, surprised with the strength of its support for EU departure and when the result came among the first that night it sent the pound reeling.

    Rothschild, who forecast Britain would vote to remain in the bloc it joined in 1973, had a lot of company.

A person familiar with the campaign's monitoring by the U.S. intelligence agencies admitted that they were befuddled by the vote's outcome." We're all scratching our heads."

By mid-week, a rise in demand for S&P 500 put options was indicating that more and more investors were either betting on a market drop or hedging themselves against such a scenario, said David Jilek, chief investment strategist at Gateway Investment Advisers.   Continued...

A trader from BGC, a global brokerage company in London's Canary Wharf financial centre reacts during trading June 24, 2016 after Britain voted to leave the European Union in the EU BREXIT referendum.    REUTERS/Russell Boyce