London stock market 'could fall as much as 20% after Brexit - wiping £450bn off share valuations'

The London stock market could tank as much as 20 per cent if Britain votes to leave the European Union, wiping £450billion off share valuations, research suggests.

Because investors would turn risk averse and demand much lower prices to compensate for higher risk levels, share prices would have to fall substantially, global research firm Absolute Strategy Research said.

The study said the so-called 'risk premium' demanded by investors on UK shares would rise by 100 basis points in the event of Brexit, indicating a 20 per cent fall in equity prices. 

The FTSE 100 index was 89 points or 1.5 per cent down today at 6,143 amid a cocktail of worries including Brexit, the oil price and US interest rates.

UK shares: Some £450billion could be wiped off the market in case of a Brexit

A top European bank has also warned that leaving the EU would see the FTSE 100 index fall by as much as 10 per cent in one year and sterling risked falling to a low of 1.25 against the dollar.

UBS Wealth Management said the FTSE 100 index could drop by over 10 per cent in the event of a Brexit, while the opposite result could see the Footsie climb 5 per cent.

The Bank of England this week claimed Investors are already shifting billions of pounds out of British assets amid the uncertainty. Some £65bn either left the UK or was converted into other currencies such as the US dollar and the euro in March and April, the Bank's figures seemed to show.

But it was also argued the figures could reflect pounds being converted into other currencies, amid wild swings in the value of sterling, rather than a flight of cash out of the UK. 

Analyst Ian Harnett, of Absolute Strategy Research, said: ‘A 20 per cent fall in UK equities could wipe £450billion off the UK market. That would be a big hit for UK pensioners.'

Investors would also suffer from a plunge in the value of the pound. Harnett said that if sterling falls against the dollar below $1.38, ‘then there is little technical support before parity - that implies a 28 per cent fall'.

Last week, Caroline Simmons of UBS Wealth Management said: ‘Many sectors, such as financial services, some housebuilders and consumer discretionary, have already underperformed the market year to date.

‘It is likely that these recent moves could be compounded in a Leave scenario or unwound, if the UK votes to remain.’ 

The UK blue-chip index, however, would suffer a less negative impact from a Brexit than the smaller companies’ FTSE 250. 

This is because the latter generates 50 per cent of its sales in the UK while the former, which is made of many international companies, just 25 per cent.

But Analyst David Bowers said the market had yet to price in the ‘high degree’ of policy uncertainty following a Brexit vote.

He added: ‘The UK's equity risk premium is lower than you might expect for current levels of policy uncertainty.’

Credit ratings agency Standard and Poor's warned last month that sterling risks being ‘considerably’ weakened in the event of Brexit and could lose its status as a reserve currency.

The S&P report warned that the loss of reserve currency status could push up the cost of Government borrowing and threaten the UK's AAA credit rating.