EU Referendum

How has the Brexit uncertainty affected the UK market?

• Although the EU referendum is dominating headlines in the UK, not all stock market movements are a result of the forthcoming vote. There are also a lot of global factors affecting ours and international markets.
• The year started with extreme pessimism about Chinese and global growth and further weakness in commodity prices. We then witnessed signs of a recovery in China and this in turn drove a strong commodity price rebound.
• The biggest news on the UK stock market has been the resultant recovery in energy and mining stocks, which has nothing to do with the referendum.

What about the currency?

• The gradual weakness in Sterling due to referendum nerves have had more of an effect on the markets. Sterling has reduced compared to the dollar, which means referendum uncertainty has actually been good news for many FTSE 100 companies, which source the vast majority of their earnings overseas.
• A cheaper currency makes UK goods more attractive to foreign buyers, and more importantly in the short term, increases the value of overseas earnings.
• There has been a tendency to misinterpret this, and view under performance in the markets as a direct reflection of the pending referendum. There is undoubtedly some domestic pressure, but it’s much more about the rotation into globally-facing companies.

Is there likely to be a big market move when the outcome is announced?

• The EU Referendum result is hard to predict, but the market is continually moving to reflect the probabilities, and will continue to do so until the vote. That means the aftermath might be much less volatile than many expect.
• It’s important to remember that a ‘Leave’ win would only trigger the start of a negotiation, and the UK would retain full access to the European Single Market while that negotiation was taking place, so there would be very little immediate difference to our terms of trade.
• If sterling continued to weaken, it would mean further improvement in sterling-denominated corporate earnings and also in dividends, which had looked under pressure.
• In the event of a ‘Remain’ victory, we would expect an improvement in sentiment towards domestic stocks.
• Above all, we should keep in mind that the UK is a global market. You could ask what the difference would be to say HSBC’s earnings if there’s an exit from the EU? You could argue that far more important to HSBC is what’s going on in emerging markets or in global commodity markets. These big global factors won’t change, regardless of the outcome of the vote.

Therefore

• As volatility continues, active management is important – Equities aren’t the only asset to consider for long term investment and generally volatility can be partially mitigated by diversifying investments across a broad range of asset classes that include equities, commercial property, fixed interest securities (bonds) and cash to spread risk even further.
• For medium to long term investors it is definitely the time to hold one’s nerve and as we have seen in the past ‘patience will be rewarded’. Our focus as always is on fund managers that can find and invest into quality companies. Whilst understandably the volatility in global markets and the pending EU Referendum will have some impact on short term valuations, over the long term, this approach works well in delivering efficiency and diversity within portfolios.
• We continue to assess the quality of any investment opportunities which come about as the result of our investment process and strict fund selection criteria. A long-term outlook when investing is clearly desirable, as short-term expectations can turn out to be unrealistic where events cannot be anticipated.
• We will always look to ensure that our clients have a portfolio that reflects their requirements (attitude to risk and timeframe for investment) whilst taking into account what the impact the current stage in the economic recovery has on their exposure to various assets.

For clarification of any points discussed above and any future independent advice regarding your own financial planning, please do contact us on 01626 833225 or email [email protected]

Important Information

• The views and opinions contained herein are those of Loughtons Independent Financial Advisers and may not necessarily represent views expressed or reflected in other economic communications.
• The comments noted above are designed to inform investors and not to persuade voters in the upcoming EU referendum.
• This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Loughtons Independent Financial Advisers does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Loughtons Independent Financial Advisers has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system.

Loughtons Independent Financial Advisers is a trading name of JPRS (South West) Limited. JPRS (South West) Limited is authorised and regulated by the Financial Conduct Authority.