The Days Since Brexit

The EU referendum has fast become one of the biggest news stories of the 21st century. Whilst no immediate changes have been made to our agreements with Europe following our vote to leave – despite mounting pressure from European leaders for Britain to start taking quicker action – the plethora of activity taking place across global markets has caused a level of uncertainty that is unprecedented in our working lifetimes.

The insecurity over our future relationship with the EU, the economic consequences of our withdrawal combined with the immediate outlook for financial markets have caused economies to behave unpredictably and, in most cases, overreact. The pound has fallen to its lowest level in 31 years, the Euro fell to a three-month low, European bank shares had their worst 2-day fall on record, world stocks (as measured by MSCI index) had their worst 2-day fall since the collapse of Lehman Brothers and $2.8 trillion was wiped off the value of world stocks – when listed in such a way, the outlook seems far from positive.

And just as the financial markets have been seen to overreact, households also tend to react adversely to uncertainty. One area that has been highlighted for fluctuation is the UK housing market, particularly in London, where turnover has been predicted to decline, especially at the high end which has already been hit by stamp duty. A more general slowing in prices has also been mooted, which could have a negative impact on consumer confidence and consequently consumer spending. With household spending accounting for almost two-thirds of aggregate demand (or GDP), it plays a very important role in the overall performance of the economy.

There is also already evidence to suggest that some companies have scaled down investment and hiring decisions but, again, this is likely to be a short term response and the eventual outcomes will be highly dependent on the exit terms that are negotiated.

Despite the negative feelings displayed by the markets over the past few days, a level of stability has already started to emerge. In a statement on Monday 27th June, George Osborne said that “the British economy was strong enough to cope with the market volatility” and that “our economy is about as strong as it could be to confront the challenge.” This statement was further supported by ex-Mayor Boris Johnson who added “people’s pensions are safe, the pound is stable, markets are stable. I think that is all very good news.” US Treasury secretary, Jack Lew, also added on Monday that he sees no signs of a financial crisis arising from Britain’s decision last week, although he admitted that the result does present additional ‘headwinds’ for the US economy.

Whilst the sterling has fallen dramatically, it has not fallen as much as might be expected, further suggesting that the activity we are witnessing is largely driven by a feeling of uncertainty. Were the sterling to remain weaker, this should give a boost to exporters and domestic industries competing with imports – however these positive effects can take a while to come through.

Furthermore, relatively resilient markets so far reflect a combination of confidence that central banks will do whatever is necessary to maintain order as well as benefiting from some opportunistic buying caused by falling assets prices.

As we wrote before the results of the EU referendum were known, the general attitude from industry experts is that we need to focus on the long-term fundamentals of the economy and the businesses we invest in. Investment strategies are designed to operate in challenging circumstances – characterised by low growth, deflation, debt problems and weak productivity – and, despite the current uncertainty, the key is to look for returns over a 3 to 5 year horizon that can withstand any short term market anomalies.

Indeed the equity sell off predicted for this week has not yet come to pass and, at the time of writing yesterday, the FTSE has closed up 2.6% to 6140, the S&P up 1.1% to 2022 and the CAC 40 and DAX are also positive.

What remains certain is that as Britain prepares to implement its withdrawal from the EU, volatility across all asset classes will persist and clients should be ready for this. Now more than ever is the time to ensure you have a well-diversified portfolio of complementary asset classes and that you are comfortable with the risk you are taking in your investments. If you are concerned about ongoing volatility, or you wish to discuss investment options and strategies to help mitigate or reduce risk, please contact your advisor who will be happy to help.

Sources:
http://www.reuters.com/article/us-britain-eu-wrapup-idUSKCN0ZD14J
http://www.cnbc.com/2016/06/24/larry-summers-warns-against-complacency-on-market-risk-after-brexit-vote-commentary.html
https://woodfordfunds.com/blog/brexit-initial-thoughts/
http://www.cazenovecapital.com/uk/financial-adviser/insights/strategy-and-economics/the-economic-consequences-of-uncertainty/