Post Brexit Reaction

We have all had our chance to vote and have judged the benefits of an independent life outside the EU to be worth the costs of leaving it.

In spite of the more emotional appeals to the contrary, this is not a disaster. The UK will certainly suffer an economic impact as businesses consider their options, possibly even a short recession, but trade with Europe will not stop. We now have two years to renegotiate our relationship with the EU. It will be in both our interests to do so sensibly and, as an economic powerhouse, we will have a good bargaining hand.

With an open economy, strong rule of law, a functioning democracy and fundamentally pro-business policies that reward hard work, over the medium term Britain will certainly prosper.

In the shorter-term there is likely to be a period of reduced investment and lower growth. This will be until the new relationship with the EU is agreed and the progressive loss of the benefits of being a member of a large trading community is settled. A general election and a re-run of the Scottish referendum are suddenly both real prospects.

But this is not just a UK issue. Our decision leads to significantly heightened political uncertainty across Europe, which may even bring the sustainability of the Euro-Zone (as opposed to the European Union) back into question. This risk is not welcome given the current situation of global businesses, potentially impacting growth even beyond Europe’s borders.

In the markets the immediate impact will be seen today in lower share prices and weaker sterling as global investors adjust to the UK’s decision. The moves are likely to be particularly sharp as markets have recently risen in anticipation that the result would be different. Sterling will be a key instrument to watch over the near term, as movements in currency will likely determine the extent of the wider market response. The initial sentiment is likely to be negative with a fall in markets, we have seen quite a lot of weakness building already, so some of the negative sentiment will already be priced in. There will likely be a knee-jerk response, potentially followed by a rally in the market as people start to think more carefully about the wider implications of weakening sterling.

Furthermore, two factors suggest that the turbulence may pass sooner rather than later. First, growth fears should not be overblown. The UK will suffer a hit, but with governments and central banks standing by to provide support, the immediate impact in Europe should be relatively small. With the US economy still delivering solid performance and the Developing world stabilising, the picture for global growth should not change very much.

More crucially, since its weaknesses were exposed in 2007, the World’s financial system has built-up its capital reserves and it is now well braced for trouble. The suppliers of capital (banks) are not overextended, the users of capital (investors) are not complacent and the world’s central banks are fully engaged in ensuring that potential issues are averted with liquidity. In this context the potential for a single adverse event (such as Brexit) to have a domino effect is low.

Therefore, whilst the system is capable of absorbing this shock, investment portfolios will certainly not be immune from some impact. We now expect a period of heightened volatility in the short term. Longer term, the UK economy is likely to be able to handle the decision to leave the EU and continue to thrive as UK growth outlook is very optimistic. Having experienced some of the strongest growth amongst the G7 nations over the past 5 years the economy is well position to handle what lies ahead.

We would re-iterate that for medium to long term investors it is definitely the time to hold one’s nerve. It is a time for cool heads and steady hands 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 and who have a good handle on current economic events. Whilst understandably the volatility in global markets will have impact on short term valuations, over the long term, this approach works well in delivering efficiency and diversity within portfolios.

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]

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