Analysis & Opinion

LONDON (Reuters) — Investors should prepare their portfolios for an upsurge in political risk in Britain, where a 2015 election could pave the way for a potentially disruptive exit from the European Union, RBC Wealth Management says.

Britain goes to the polls in May and the current government has pledged to hold a referendum on EU membership in 2017 if it wins another term in office.

But while possible breakaway from the EU, termed Brexit, carries major implications for Britain’s economy and financial markets, the issue has not made it onto investors’ radars, RBC’s portfolio strategist George King said on Wednesday.

At the beginning of the year we were cautious on emerging markets because of elections in key markets. Ironically. just as the political risk stream in emerging markets begins to ameliorate, we see it beginning to rise in the United Kingdom, King told the Reuters Global Investment Outlook Summit.

We are not trying to (predict the outcome of the election)..all we are saying is that if the risk isn’t priced in we should be aware of that and decide what to do.

Some other summit participants have also warned that election rhetoric may already be deterring foreign investment. And the Bank of England said this week that uncertainty was likely to build among businesses as elections near.

Anti-EU party UKIP is expected to win a by-election in Rochester this week, picking up its second parliament seat.

King, part of a group that runs almost $400 billion, said the situation was similar to this year’s Scottish independence referendum, which was ignored for months before last-minute turbulence roiled UK financial markets and caught investors unaware.

King has an underweight position on UK equities, though that is not dictated by potential election risk. Dealing with election risks is so far confined to internal discussions, rather than with clients, he said.

We already have recommended underweight to the UK market, (but) is there something more strident we should do. Should we have an asset allocation shift? should we look at protection. things like that, he added.

King said he was keeping an eye on Spain and Greece which also face elections in 2015, but saw the conditions there as less worrisome than in the UK, where he said there was much more potential for an unknown outcome.

Globally King prefers equities to debt. He also likes high-grade corporate bonds and debt from strong banking names in the euro periphery.

The last trade is partly motivated by the prospect of support from the European Central Bank (ECB).

King expected the ECB to do what was necessary to avert deflation. Markets are waiting for the bank to embark on a full-fledged sovereign bond-buying program.

The timing at which the ECB acts decisively is still unclear, but that they will ultimately do what needs to get done should not be in question, he added.

(Additional reporting by Chris Vellacott; editing by Keiron Henderson)