Brexit: What's going to happen to your investments?

We're definitely at the pointy end of the Brexit debate. Bookies have the odds at around a 70%‒80% chance we'll remain in the European Union, although the polls are closer on whether we stay or split.

Obviously we don't have a crystal ball, but what we can tell you is that volatility should be expected in the coming weeks at least. So it's helpful to take a look at a few key asset classes and what might happen in each scenario.

In broad brush strokes, if we do leave, investors can expect:

• Sterling to fall

• UK stock market to fall

• Global markets to potentially fall on EU break-up fears

• Credit spreads to widen (the difference in price between government bonds and corporate bonds to increase).

Of course, some of these movements are already happening. For example, most of us have noticed the pound has come down significantly against the US dollar and the euro this year. This means if we stay, there may be some opportunities as these assets pick back up.

But I would caution individual investors against trying to time markets - even the professionals often get this wrong - and as one Brexit scenario starts to look more likely than the other, you may find currency, equity and bond prices will adjust even before the vote takes place. Meaning you probably won't get the big bounce you might anticipate.

Rather, it's a good idea to understand which investment could offer the best protection in volatile markets.

1) Hold other currencies

Currency is key. Traders are already paying more for protection against an outsized fall in the £/$ exchange rate than they did during the global financial crisis. Common estimates suggest the pound could fall by as much as 7.5%–12.5%, or rise by as much as 5%! The obvious way to protect investments is to have some assets outside the UK in currencies other than the pound. This way, if the pound falls heavily, you may still be able to make money. For example, holdings in US dollars would be worth more when converted back to pounds (sterling).

2) Hold US treasuries

US treasuries are denominated in dollars, meaning again investors may make money on the currency in the event of a Brexit. They are also considered a safe haven, so they should rally if 'risk assets' (equities and corporate bonds, for example) fall. US treasuries also have the advantage of offering a higher yield than their European equivalents, so they still look to be relatively good value in comparison. In an uncertain world, some exposure makes sense.

3) Hold gold and gold equities

Gold is another safe haven asset and the spot price is also in US dollars. In the event of a Brexit, expect gold to rise strongly in sterling terms. Again, investors could potentially benefit both from the both the fall in sterling and the fact that investors will run for safe havens (i.e. more people will buy gold, pushing up its value). Gold equities could be another way to play this, although it is possible they may initially get caught up in an overall equity sell-off. The BlackRock Gold & General fund, managed by Evy Hambro, is on the Chelsea Selection.

4) Avoid UK small- and mid-caps

If investors are worried about a Brexit, they should probably avoid funds that are heavily exposed to the UK domestic economy, as these are the most likely to suffer. These are more likely to be smaller and mid-cap funds. A fall in the pound could actually be good for UK companies that export or get most of their profits from overseas. These companies tend to be large-caps or mega-caps – although they won't be entirely immune.

5) Hold gilts

According to PIMCO, there are good risk-reward characteristics in five- and 10-year gilts, with the market currently pricing in a 25% probability of a 25-basis-point rate cut this year. With inflation low, they see a very small probability of a hike in the next 12 months, regardless of the outcome in June, and in the event the UK votes to leave the EU, they think it likely that the Bank of England would cut the official rate to zero, potentially boosting gilt prices. TwentyFour Asset Management also make the point that UK companies won't suddenly become less solvent overnight, but bond markets are still correlated and we've seen bond yields widen already. This could be amplified in the immediate aftermath, but fundamentals should steady things reasonably quickly.

By Darius McDermott, managing director, Chelsea

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius' views are his own and do not constitute financial advice.