The result of yesterday’s referendum on whether the UK should stay within the EU led to a narrow victory for the Leave campaign. Whilst the polls had indicated that the voting would be close, there had seemed to be a growing consensus that the result would be to remain and this was effectively priced in to stock, bond and currency markets. The considerable volatility in the wake of this surprising result is understandable and will remain high in the short term. The question on most people’s lips is what next for the UK?
This situation is unique; there is no verified or tested precedent for an EU exit. This means it is uncertain what happens next, but we think the following is the most plausible:
- Article 50 of the EU constitution, the law governing the process of the UK’s divorce from the EU will be triggered, but not imminently;
- This will kick-start the formal two-year process determining the term of the UK’s EU exit, including the shape of its future access to the single market;
- We thought there would be considerable pressure on Prime Minister David Cameron to resign, which came to pass during Mr Cameron’s heart-felt press conference this morning.
There will undoubtedly be implications for the UK economy, which will probably manifest itself as a short-term negative impact on growth, which can be explained by:
- Increased uncertainty and reduced confidence depressing private consumption and fixed investment;
- Increased risk premia in UK bond and equity markets, and potentially higher borrowing costs;
- Increased uncertainty, risk aversion, and possibly higher funding costs in the UK financial sector.
It should be noted that a weaker pound is likely to support exports and the Bank of England may cut interest rates, mitigating the overall adverse effect. There will be a significant impact on the UK stock markets and in the short run investors should expect the following:
- Shock to investor confidence and increased UK asset price volatility;
- Despite today’s sharp fall in the value of Sterling, particularly against the US Dollar and the Japanese Yen, further volatility is likely;
- Downward pressure on UK equities, especially financial sector stocks and those most reliant on EU migrants (for example, construction and hospitality sectors) and less pressure on companies with large overseas earnings (it should be remembered that over half of the earnings of the FTSE 100 Index companies are derived from overseas);
- Modest upward pressure on Gilt yields is possible owing to increased uncertainty, higher risk premia and the prospect of higher inflation due to the weaker pound (although initial yields could fall due to a flight to safety);
- Modest declines in UK house prices are possible, owing to reduced buyer confidence and a possible uptick in unemployment.
With all of this uncertainty it is important to remember the long-term nature of successful investing. To accompany this update, we recommend three articles by Fidelity (‘10 key volatility messages for investors’, ‘Putting time on your side’ and ‘When doing nothing is best’), detailing the importance of managing volatility which you may find useful, time in the markets and avoiding knee-jerk reactions; we hope you find this useful and reassuring.
Please be reassured that we have a robust and strong investment process that has delivered solid returns over the long-term. Your portfolio is well diversified. It is during periods of uncertainty that difficult decisions can prove to be significant for our long-term wealth. Our message is and continues to be ‘Keep Calm and Carry On Investing’; this is not the time to panic and not the time to listen to the extrapolations of the press.
Life will continue and it is important to sift the fear from the opportunity; when more dust has settled in the next seventy-two hours, we will be issuing our weekly Monday communication ‘Windy’ which will be a deeper dive into what we might expect over the short-term.
In the meantime, hear Shane Balkham, Head of Portfolio Construction and Research at Beaufort Investment, give an overview of what to expect as a result of this historic decision.