The result was certainly a shock for many and most definitely for the markets. Equities had risen ahead of the vote, Gilts fell as did Gold and Sterling had strengthened. The Bookmakers odds has shortened considerably and the odds stretched out for the leave campaign. Even Nigel Farage, shortly after midnight seemed to concede defeat. The betting markets priced in a 90% probability of the UK remaining.
Of course, waking up to the news this morning (no, we didn’t stay up all night!), we immediately reflected on our positioning for our clients, the moves we had made to protect portfolios before swiftly moving on to see if we need to do anything differently on the back of the outcome.
The key is not to panic. This could be very costly. There is no doubt, however, that we are entering a period of uncertainty. This has never happened to the UK before and it is going to take some time for the picture to become clear. A negotiating window to agree exit terms will shortly be underway. David Cameron has announced his resignation (the markets seemed to like this). Jeremy Corbyn is also under attack for not empowering supporters to follow his lead and vote to remain.
We are going to hear claims and counter claims over the next few days. We are going to have a whole host of people predicting anything from Armageddon or Doomsday to Utopia and Nirvana. Truth is, nobody knows. It is inevitable though that there will huge bouts of uncertainty.
The main considerations are economic, political and market uncertainty.
We always knew there would be economic uncertainty if we left the EU and that is now beginning to unfold. The value of the Pound fell by the greatest amount that we’ve ever seen when it became obvious which way the vote was going. Not great news for your foreign holidays and certainly not pleasant news for our imports, as goods are likely to be more expensive. Exports, however, will prove to be cheaper and attractive. It remains to be seen where the pound stabilises after it reached a low, not seen since 1985.
Many economists are expecting us to fall into a brief recession, which offers an interesting dynamic for property. Whether property prices rise, fall or stabilise depends very much on the Bank of England’s monetary approach. There is no doubt they have a balancing act. Interest rates could fall in the short term. Interest rates may well fall to zero as the Bank of England are likely to engage in some form of monetary policy like quantitative easing to offset potential economic stress. The problem is that this may be accompanied by further austerity measures with wage rises capped or at zero, particularly in the Public Sector. Certainly this was a bi-product of quantitative easing during the financial crisis.
We expect lending for house purchases may stall because the banks will be worried about the uncertainty and certainly won’t want to lend for those with relatively small deposits who require a high percentage mortgage. Not great news for younger people particularly.
It’s very difficult to predict the pathway for inflation in the short term. The Bank of England could find themselves in a situation whereby they don’t want to increase interest rates because of a fragile housing market but at the same time are concerned about rising inflation on the back of increased cost of imports.
The City of London is likely to see less capital investment and high end properties could fall. The building of new commercial property could be mothballed as demand for space in London wanes. The flip side…and there is always flip side, is that if property prices fall and the pound remains weak, then there could be a real attraction for foreign investors investing in the UK. They will, in effect, buy properties at a considerable discount to what they could have bought them before the vote.
We have already seen a number of EU fringe parties calling for a referendum on the back of the UK vote. In many ways this presents the biggest risk of all. Political uncertainty in what is the largest single trading market in the world. This uncertainty will affect capital investment and of course confidence. We have the elections in Spain on Sunday and the majority of EU members have their general elections within the next 18 months. Any further shocks could create a drag on global growth and confidence.
Interestingly, although Sterling has been spooked by the decision to leave, we expect in the months ahead that the uncertainty in Europe may weaken the Euro against the pound. Clearly, there is a lot of water to pass under the bridge before we can have real conviction on this but it wouldn’t be a surprise.
Close to home of course there will be uncertainty and we could see further resignations following Cameron’s announcement this morning.
Whilst the market reaction has been polarised depending upon the type of assets we are talking about; i.e. Gold moved up strongly and equities fell dramatically. Over the next few days there will significant swings in prices but undoubtedly because of the ‘herd’ mentality of selling riskier assets in favour of perceived ‘safe’ assets, opportunities will present themselves. Anybody with a portfolio of pensions/investments should be alert to these opportunities. Of course there is the old adage of ‘time in the markets not timing the markets’ as being words of wisdom but this can really keep you awake at night if you are uncomfortable in the short-term. Fortunately, we positioned client portfolios into a neutral position a few weeks ago, despite the probability of a remain vote increasing throughout the last week. We have an exposure to the US Dollar, US Treasuries, Gold and other foreign currency with a limited exposure to Sterling. All proving to be safe havens.
For money invested in UK and Europe, it is likely to be mid cap sized funds and smaller companies which endure most of the short-term pain. Larger cap funds tend to have more of a global exposure although global markets are fearful of contagion.
It’s worth noting, however, that the FTSE has firmed as I write and is around the same price it was earlier in the week, on Monday 20th June.
Financial markets and the bookies certainly didn’t expect a ‘leave’ vote with a 90% expectancy of the UK remaining in the EU on the day of the vote. Markets tend to overact to any nasty shocks and a flight to safety ensues. This doesn’t mean that some of these assets are as safe as they are perceived. It is important to have a strategy and be flexible via a tactical approach using a number of instruments to protect capital and optimise returns. It is at times like this when ones’ risk appetite is really tested. Unfortunately, the vast majority don’t have a strategy and it is only in such times that attention is paid to their money. We anticipate a high number of phone calls from new potential clients in the next few weeks from people who are suddenly shocked by the value of their investments and pensions. If you know of anyone who hasn’t got a strategy, then you know our number.
It is important not to panic. This is not the financial crisis of 2008 proportions. It doesn’t mean there might not be pain along the way but we will seek to minimise this wherever possible.
Hang on to your hats
Chair of Blue Sky Investment Committee