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[SINGAPORE] A British vote to leave the European Union this week could send Asia's emerging markets into a tailspin - yet investors in the region appear surprisingly calm about both the prospect of a Brexit and its impact on markets.
Most startling are current market expectations that place the probability of a Brexit - a British vote to exit the EU - much lower than what actual political polling suggests.
However, with the likely market downside from an exit vote much larger than the likely upside from a remain vote, analysts say Asia's current market positioning means investors could suffer major losses if Britons vote to leave the EU.
"We don't think the market has priced (Brexit) in enough,"said Mark Wills, head of State Street's investment solutions group in Sydney.
A survey of about 200 US investors by a research group the firm uses found that 90 per cent did not think the June 23 vote would favour Brexit.
"If you compare that to what the actual polls on the ground are saying, it indicates to us that financial markets are still too sanguine," Mr Wills said.
Pre-referendum polls show support for remain campaign only slightly ahead of the exit campaign.
While Asian investors do not hold much sterling or sterling-denominated assets, a British vote to leave could spark a huge drop in sterling - 8-15 per cent by most analysts' forecasts - and that could prompt worried investors to get out of any risk assets, such as Asia's mostly emerging markets.
To be sure, current market pricing in Asia has not ignored the event risk the June 23 referendum poses.
MSCI's broadest index of Asia Pacific shares outside Japan has fallen more than 3 per cent over the past two weeks, while 10-year government bond yields plunged in South Korea, Indonesia, Thailand, Malaysia and Australia.
The yen, Asia's favoured safe-haven play, has surged to a near 2-year high of 103.58 with yen net long positions at US$5.3 billion, their highest since early May.
And traders say policymakers are primed with Indonesia, Malaysia, Korea and India central banks poised to intervene to either shore up their currencies or ensure orderly weakening if market volatility spikes.
But even such defensive posturing looks short of what might be needed to protect investors from the turmoil that a sterling plunge of 10 per cent could cause.
Goldman Sachs, for example, thinks a "leave" vote could cause the yen to surge well over 10 per cent against the US dollar, assuming no change in monetary policy - far more than markets have priced in.
Asian stocks could also face selling pressure. Japanese stocks look vulnerable given their strong correlation with the yen.
Other major Asian exporters, including South Korea, Taiwan and China, would be the most susceptible to outflows given their global exposure, State Street's Mr Wills said.
A crucial question is how badly currencies - perennial weak spots for many of Asia's emerging economies - will get hit. A sharp fall in currencies could accelerate foreign selling of stocks and bonds and lead to a shortage of dollars as investors repatriate funds. Foreigners, for example, hold more than a third of Malaysian and Indonesian government debt.
"Regionally, currencies that stand out are the rupiah and ringgit, which historically have been extremely susceptible to waves of risk-off," said Stephen Innes, a senior trader for FX broker Oanda Asia Pacific in Singapore.
"If the pound falls sharply, I would expect both currencies to get hit very hard over the short term."
Lee Jin Yang, macro research analyst for Aberdeen Asset Management in Singapore, sees Korea's won as an at-risk currency.
However, some investors think that post-Brexit volatility could create small windows of investment opportunity.
"We have a clear view of the intrinsic value of stocks in our portfolio and in our watchlists and would look for stock-specific opportunities to buy or sell if markets overshoot in either direction," said Robert Davis, senior portfolio manager at NN Investment Partners in Brussels.
Jennifer Ellison, principal at wealth management firm B|O|S in San Francisco, expects any selloff would not be sustained as the actual economic and political repercussions of an exit vote would play out over a much longer period of time.