The investor’s guide to life after Brexit

Why certain stocks crashed, what’s next for investors and how best to position your portfolio.

Investors were taken by surprise on Friday 24 June when the UK voted to leave the EU. Banks, housebuilders, asset managers, recruitment companies and insurers were among the worst hit. Gold miners and companies with dollar earnings and costs in sterling were the only clear winners from the market turmoil.

Monday’s (27 June) stock market activity managed to avoid a second day of total meltdown, although there was a continuation of the sector performance trends. By Friday 1 July, the FTSE 100 had recovered all of the lost ground.

Investors now need to think differently about how they approach certain sectors despite the stock markets having regained some strength.

There are new risks to consider with earnings so you must not get emotionally attached to industries which have previously served your portfolio well.

You also need to consider if the market has overpriced risks so there is a chance to buy on the cheap.

Here are some answers to questions relevant to investors.

Q: Is this a repeat of the financial crash in 2008?

A: No, that event was caused by a collapse in the financial market. Brexit is going to be a much longer, drawn-out event with considerable uncertainty – exactly what stock markets hate. It will therefore be important to have a diversified investment portfolio and reassess your risk appetite.

Q: The Brexit vote saw the pound fall to its lowest level since 1985. Why is the slump in sterling so important?

A: It can have a dramatic impact on companies that either have costs in sterling and revenue in another currency or vice versa. Their reported earnings could be better or worse. Short term a weak sterling makes UK export goods cheaper to overseas buyers and therefore attractive. Longer term UK-based exporters could suffer from increased tariffs in the EU.

A fall in the pound raises the likelihood of inflation as buying goods or services from other countries will become more expensive. Theoretically that should encourage the Bank of England to push up interest rates but it is hard to see that event in the near term as it could hurt the economy. If anything, rates might fall before they rise.

‘UK manufacturers that purchase raw materials from overseas will see some input price inflation,’ says FinnCap analyst David Buxton. ‘If sterling remains at these levels it will stimulate new export orders for UK manufacturers.

‘Post-exit we are concerned that exports from the UK to EU will see increased tariffs and other such barriers, so over the medium term we favour US dollar and Asian profit streams; areas also backed by better growth fundamentals,’ he adds.

Q: Does sterling weakness make UK companies more attractive takeover targets to foreign firms?

A: Yes. ‘If you are a dollar-denominated company looking at UK assets, suddenly they look more attractive overnight because of the currency change. There are definite opportunities for M&A,’ says Nicholette MacDonald-Brown, portfolio manager at Schroders.

Q: Will Brexit have a negative impact on the UK’s economy?

A: A decline in consumer spending, corporate expansion and foreign direct investment are the three big risks to the British economy while a new trade agreement is drafted. Echoing these themes, AXA Investment Managers has revised its UK GDP forecast for 2017 to 0.4% from 1.9%.

‘The UK economic outlook is likely to be severely affected by the decision to leave the EU,’ says David Page, senior economist at AXA. ‘We estimate two successive 0.25% (interest) rate cuts and the likelihood of £50-100 billion of quantitative easing (QE).’

Q: What else will the market worry about?

A: Political issues will certainly be near the top of the list. Prime Minister David Cameron resigned immediately after the Brexit vote but he won’t leave for another few months. Markets may fret about potential policy changes under new leadership; they will also revisit the possibility of another Scottish independence referendum.

If that’s not enough, expect to see contagion spread across Europe and other countries to look hard at their own position in the EU. Both France and Germany have general elections next year. And don’t forget the US goes to the polls to elect a new president in November.

Q: What’s the possible timeline for leaving the EU and agreeing new trade deals?

A: Cameron says he won’t start the exit process until a new prime minister is appointed. The process falls under Article 50 of the EU treaty and provides the UK with two years to negotiate its departure.

There are several options to pursue. One is to follow the Norwegian model – still giving the UK access to the EU’s single market. It could negotiate its own free-trade agreement but this would take years to complete. The only other viable option is to trade with the EU under World Trade Organisation rules which would see the imposition of tariffs.

FTSE 350 top fallers since brexit vote result

Source: AJ Bell Media, SharePad. Data is from 23 June 2016 market close (ie. day before Brexit outcome announced) until 9.30am 1 July 2016

FTSE 350 top risers since Brexit vote result

Source: AJ Bell Media, SharePad. Data is from 23 June 2016 market close (ie. day before Brexit outcome announced) until 9.30am 1 July 2016

FTSE 350 sector best and worst performers since Brexit vote result

Source: AJ Bell Media, SharePad. Data is from 23 June 2016 market close (ie. day before Brexit outcome announced) until 9.30am 1 July 2016