Brexit one week on

What a shock last Friday was. I woke up and the world looked very different.

A fitful night’s sleep had enabled me to keep abreast of how the result was heading and I had already planned a series of early morning calls with my team. “The market is shut for business, the maximum market size in Unilever is £100,..” was the first bit of news.  “The PM is stepping down…” was the second.  “The opposition is imploding…” was the third and “Scotland wants to stay in Europe and have another referendum….” was the fourth and final bit of news.

I was quoted during the campaign as being a reluctant realist, preferring us to remain in the EU. Not because I don’t think the UK can forge its own path, but rather because I have doubts that the economy is strong enough at the present time to deal with the choppy waters that we will need to chart along the route to independence.

This view was reinforced by a fear that a vote for independence would lead to a wounded Europe fighting for its very survival, resulting in an inevitable backlash against the UK.  Nothing has happened this week to change my mind.

Whether people truly understood what they were voting for is now for the history books and the conscience of those politicians and business leaders on both sides of the argument. Seeing Boris backtrack on his reasoning for supporting Brexit, watching Nigel Farage triumphantly goading fellow MEPs with his, “You’re not laughing now, are you…” taunt and witnessing Cameron’s about turn on his claim he would stay in office if he lost the vote all add grist to the mill for those who question the integrity of politicians. It has been interesting that most of the high profile business leaders that supported a Brexit have been uncharacteristically quiet since the outcome was announced. 

One week on I have had a chance to reflect what the Brexit vote has brought us.

While the UK’s decision to vote “Leave” was clearly a surprise to the financial markets, their response so far has been predictable, with clear winners and losers emerging:

Losers

• Riskier assets such as shares have become more volatile, although the main FTSE 100 and FTSE 250 indices have recovered all the ground they lost in the immediate aftermath of the vote and were trading higher at the time of writing. Markets have taken some comfort from Governor of the Bank of England, Mark Carney’s confirmation that the central bank is prepared to step in and do whatever it takes to maintain economic growth, although given that the February market wobble was the result of a sudden loss of faith in central banks’ abilities to fuel a strong recovery, it remains to be seen just how potent the Governor’s intervention proves to be.
• The UK stock market has been volatile but Europe has done much worse, owing to fears the “Leave” vote could spark calls for similar ballots across the continent. The Italian, Spanish and Portuguese markets have been especially hard hit, as have banking and financial services stocks, as investors have pondered whether a fresh economic downturn will add to political turbulence across the EU-27.
• Within the UK stock market, stocks with heavy exposure to the domestic market have been treated particularly harshly, notably house builders, property stocks and retailers amid fears of a recession. Banks and financial services stocks have suffered due to concerns about loss of “passporting” rights and access to the EU’s markets.
• The pound has been pummelled, plunging to three-decade lows against the dollar.

Winners

• Within the stock market, defensive names, low volatility stocks, strong cash flow generators and dollar earners have done relatively well or even gone up in absolute terms.
• Government bonds have soared as investors have scrambled for a haven, seemingly irrespective of the low yields on offer.
• Gold and silver have moved sharply higher, dragging precious metal miners along with them.
• The dollar and yen have risen sharply, owing to their haven status.

Given the uncertainty over when (or even whether) the UK will ultimately invoke Article 50 of the Treaty of Lisbon and formally withdraw from the EU, and the absence of a crystal ball to tell us what this will ultimately mean, markets seem likely to remain volatile.

Volatility is not a problem in itself, providing a portfolio is sufficiently well balanced and diversified that an investor can take a long-term view and get through to the other side. Volatility can even be a chance to take advantage of market inefficiencies, by selling assets expensively or buying them cheaply.

Investors should nevertheless resist the urge to tinker with their portfolios for the sake of it. They should only act if they feel there is a strong valuation case for doing so, if they are aware of the costs they are incurring and if any portfolio changes fit with their overall strategy, time horizon, target return and appetite for risk. As Warren Buffett put it, using a baseball analogy, you don’t have to try and hit every ball and you are not faced with a limited number of chances to bat: “The stock market is a no-called-strike game. You don’t have to swing at everything, you can wait for your pitch.”

With that in mind, Russ Mould our Investment Director has outlined the four key issues which he believes confronts portfolio builders.

• Will there be a UK recession?
• What to do for equity income?
• What to do about other forms of income as Government bond yields grind ever lower?
• What to do about gold and silver?

Read his full article here.

The UK needs to find a new Prime Minister and quite probably a new leader of the opposition before triggering an exit under Article 50. Whoever they may be we will certainly see politics, economics and investment markets interact like never before over the coming weeks, months and years.

Andy Bell, Chief Executive