On Friday 24th June 2016, the British public voted, by a small majority, to leave the EU. This landmark vote leaves Britain needing to untangle and re-negotiate forty years of political and trade agreements with Europe and the rest of world. And, with David Cameron indicating he will step down as Prime Minister later this year, our country will be doing so with a new leader.
What was the market response?
In the days leading up to the vote, both Sterling and markets had staged a rally as polls indicated ‘remain’ was leading. Unsurprisingly, as news hit markets that the result was ‘leave’ sterling took a significant hit, falling more than -10% against the dollar to levels not seen since 1985. Risk assets such as shares were also hit hard, with the FTSE-100 falling over -8%* in early trading, while safe-haven assets such as gold and government bonds rose. As the initial shock wore off, the falls in Sterling and markets paired leaving them down by -7%* and -2.5%* respectively by the end of the day.
On Monday 27th June, markets have remained volatile with the FTSE 100 down around -2% at the time of writing. However, underlying companies have showed significantly different performance with multinationals proving relatively resilient but domestic UK companies (UK banks, housebuilders and retailers) being hit hard. While overseas markets are also slightly down, the fall in Sterling means that funds investing in America, Asia or globally are actually showing a rise (in Sterling terms); the benefits of a diversified portfolio. UK gilts have also risen, proving, once again, bonds importance as a diversifier in portfolios.
While some of the more extreme movements may prove to be a little overdone, the divergence in performance points to a more rationale market reaction. There is little, at this time, to suggest any substantial market corrections or crises.
What happens now?
The Prime Minister, David Cameron, has indicated he will step down by the time of the Conservative Party Conference in October. The new Prime Minister, whoever that may be, would then be responsible for invoking ‘Article 50’, the formal notice of Britain’s resignation from the EU. We would then have two years to negotiate our exit from the EU, during which time we would still be bound by existing trade and political agreements.
What is the outlook?
Over the short-term investment markets will remain volatile and asset class prices will be significantly affected by market sentiment and politics. Currency markets will remain volatile but it is worth remembering that Sterling weakness, while bad for importers and is positive for exporters. It is quite possible that economic growth in the UK could see a short-term economic downturn as businesses and consumers delay investment and/or spending. Fortunately, we have an independent central bank which can, and will, act to try and prevent any large-scale issues, for example by holding or reducing interest rates and perhaps even extending quantitative easing.
Regardless of the opinions and hyperbole espoused by the ‘remain’ and ‘leave’ camps in the run-up to the vote, no-one really knows what the future now holds; it is a step into the unknown. However, in my opinion choosing to remain or to leave was always a political and/or ideological choice. Business will continue, companies on both sides of the channel will continue to trade with each other and consumers will continue to spend. The outlook from an economic and investment perspective, although more uncertain in the short-term, will likely be very much the same over the medium to long-term.
However, with global interest rates remaining low (and expectations following Brexit are that they will remain lower for longer or may even be cut further) we should perhaps expect a period of lower returns from investments than we have been used to in the past. While this is less than ideal for investors, equity returns of even 5-6%pa (with dividend yields are around 4.14%** currently) would still be significantly better than cash rates, particularly in a low inflation world.
Neil Ledbrook APFS
“In the longer-term, it is my view that the trajectory of the UK economy, and more importantly the world economy, will not be influenced significantly by today’s outcome. Although market conditions such as these can be unsettling, we would strongly urge investors to look through this period of uncertainty and focus on the long-term opportunity which, in our view, continues to remain attractive.”
Neil Woodford, Woodford Investment Management LLP
“Time and again throughout history markets have faced shocks that can seem calamitous. But they do recover. Companies continue to trade, profits continue to be made and stock markets over the long-term tend to go up.”
Edward Bonham Carter, Vice Chairman at Jupiter Asset Management.
*Source: Yahoo Finance.
**Source: Upcoming dividends.co.uk
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