Brexit – what’s happened to investment markets?

June 23rd will likely go down in UK History as one of near seismic proportions. At the time of writing, none of us can truly know the extent of the fall-out, or indeed long-term benefits, of the Referendum decision.

One thing we can be fairly certain of is that, in the short-term, Markets for risk assets such as equities (a main component of many peoples investment portfolio), will be as volatile and unpredictable as a UK opinion poll.

What does the result mean?

In the very short-term there will be a period of uncertainty and anxiety, followed by re-evaluation and possible supportive measures from central banks and policy makers. Whilst we can’t know the exact magnitude or detail of these, we can expect investment markets to be seriously unsettled for a time and the UK £ to come under pressure in the short-term. This is good news for our exporters but potentially problematic for those that are ‘net-dependent’ on imports.

In reality, the world will still keep spinning, countries will still trade, UK companies will still export, UK consumers will still keep spending and, at some stage in the not too distant future, sanity will prevail.

What protection does an investment portfolio have?

At times of heightened Market volatility, it’s important to remember that investment portfolios are often heavily diversified, investing in a broad basket of assets. Investment professionals seek what are referred to as uncorrelated returns on behalf of investor clients. This means that should the value of one asset fall, such falls are not mirrored in other asset classes and, if anything, other asset classes may have the propensity to increase. To some extent, this behaviour has been evident within fixed interest markets of late as Bond yields further compressed and values rose, partly driven by a ‘flight to safety’ and partly by expectations of lower interest rates.

Market behaviour going forward

Our general belief is that it will be counter-productive trying to double guess every knee-jerk market reaction, particularly as investments should be viewed as a longer term discipline. We do believe intervention by central policy makers, both in the UK and Europe is likely at some stage and, furthermore, the data dependent US Federal Reserve is now likely to hold any further rises in US rates, at least for a while. We are of the general opinion that any calming of Markets by policy makers, whether by rhetoric or action, will present a further opportunity for investors to rationalise risk, should they wish to.

A time for calm reflection

It would be only too easy to become consumed by risk aversion in this time of change and uncertainty.  History tells us that some of the more productive investment strategies are to hold one’s nerve when others are fearful and to be guarded when others are greedy. We need to bear in mind mantras of this kind, particularly as many of our leading FTSE 100 businesses are truly global, exporting all over the World.

It is often quoted that over 70% of the revenues from such companies are derived outside of the UK.  Against this backdrop, any interim pain to the UK Economy may not manifest itself in the share prices of some of the UK’s leading equities to the same extent.

What is driving this rally in equity Markets and is it sustainable?

Rallying Markets may seem counter-intuitive but it is preferable to a falling Market, no matter how unexpected the outcome. In brief, we believe we have identified the following factors as driving Markets:

  • A dramatic weakening of UK £ Sterling relative to USD $ Dollar (at times approaching 13% since the Brexit vote) making UK investments considerably more attractive to overseas USD $ investors.
  • An expectation of interest rate cuts in the UK, with some corners of the Market expecting interest rates to fall to 0%.
  • An expectation of central bank intervention to support Markets if required.
  • A lingering expectation, perhaps unfounded, of a Norway EEA style agreement post Brexit.
  • Possible short covering by Hedge Funds distorting market conditions further.

We are no doubt in a sentiment driven Market with little regard for underlying fundamentals, at least not for the present. We can be reasonably confident that one of the few certainties is uncertainty, at least for the next 3 or 4 months as clarity begins to emerge over the shape and form of any ‘Brexit’.

If you have any queries about the issues raised in this article or to be put in contact with a member of our team, please contact Hannah Farmborough or call on 0207 429 4147.

This article is for generic information only and should not be construed as advice. The content detailed within is based upon current legislation and is therefore subject to change.  Please contact us before proceeding with any course of action.

This article originally appeared on the blog of our member firm, Broomfield & Alexander.