Brexit Blog, Simon Holman
The short answer is uncertainty prevails – and financial markets never like uncertainty, as we have witnessed for three years running now with the Scottish Independence referendum, the UK General Election and now this referendum on EU membership. (It’s best not to contemplate the US Presidential Election later this year at the current time). The first two situations, however, brought decisive results and swift resolution. With this vote to leave the EU, the uncertainty has only just begun.
To assess why, we need to consider the legal situation, as highlighted by David Allen Green who covers law and policy at the Financial Times. The first point is that the referendum result has no legal impact. It might be a brave politician who tries to ignore the outcome, but David Cameron – as acting Prime Minister – is not legally bound by it. The second is that the key legal event is the “pushing the button” on the Article 50 notification, which is what will set in motion the two-year period for the UK and EU to negotiate our exit. David Cameron has not pushed it this morning and Boris Johnson is apparently in no rush to. Senior EU figures have put out a statement encouraging this to happen as soon as possible – but the EU cannot force the UK to do so. By the same token, the UK cannot force the EU to negotiate until it pushes the button. So even at this early stage, there is potentially political deadlock. Furthermore, the button may never be pressed.
Regardless of if or when this process is begun though, there is an inevitable period whereby consumers and businesses alike will be uncertain on what economic and personal impact a move to leave the EU will bring. For you – our clients – it would be natural to be concerned, or at the least inquisitive, about what this means for your investments.
Our key message would be that maintaining perspective is key. Stock markets have fallen sharply today, albeit they have recovered steadily from their opening levels when the scale of the shock hit hardest. However, the UK market is above the level it was at just two weeks ago before investors believed that the ‘Remain’ camp would win the day and also above the lows for the year that were seen in February. So perspective is valuable here. Currency markets have also been volatile and sterling has unsurprisingly weakened against virtually every other globally-traded currency. This makes foreign travel more expensive – and indeed Thomas Cook has suspended its online currency service given the demand for euros – but also brings a benefit for investments held in other currencies, as their returns will now receive a boost when translated back into sterling terms.
A further important point is that the referendum was in the public domain for a long time and policymakers have prepared for this eventuality, which is in contrast to the 2008 crisis when Lehman Brothers went bankrupt overnight and the banking edifice came crashing down. As a result, the Bank of England was ready to announce that it would make £250bn of funding available to banks if any needed it, with the further promise to take “additional measures” if required. This helped to stabilise markets. One suggestion made during the build up to the vote was that a decision to leave the EU would trigger interest rate rises to combat a surge in inflation that might be caused by the sharp weakening of sterling. This cannot be ruled out, but the immediate aftermath of the result was that UK government bond markets moved to price in a 50% chance of a rate cut in July. In the short term, therefore, that would be a policy decision that would ease the cost of e.g. mortgage payments and provide some support to household finances that might otherwise come under strain. Similarly, the US bond markets now price in a greater chance of an interest rate cut by the Federal Reserve during 2016 than of a rise. These actions may or may not come to pass but they show that policymakers do have tools available to them to try and mitigate the effects of the uncertainty.
We could highlight some of the areas worst-hit by today’s moves, such as European bank shares and housebuilders and retailers here in the UK, albeit these moves are not unsurprising. Equally, despite the headlines, there are a number of companies whose share price has actually risen today. So, as ever, financial markets are rarely uniform and it is our job as stewards of your assets to assess the long-term implications and act as necessary. This is only day one of the post-referendum period and as such, it is realistically too early to say for certain whether the market has sold off excessively or whether this is the tip of the iceberg. But by maintaining an equal focus on both client objectives and a disciplined investment process, we will aim to navigate these unsettled waters on your behalf.
This is not an offer or a solicitation to make an investment. It does not constitute a personal recommendation and recipients must satisfy themselves that any investment is appropriate in the light of their own understanding, appraisal of risk and reward, objectives, experience and financial and operational resources. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research.