Market Reaction to the Brexit Vote

We have woken up this morning to a referendum result which we did not expect when we went to bed last night particularly after the initial polls showed a Remain lead. Capital and currency markets, which had likewise not anticipated this outcome are around the world opening between -6 and -11% lower and the external value of £-Sterling has also declined around 10%. From a Global perspective UK investments are down around 20%.

The London stock market has fell initially by 7% in the wake of the UK’s vote to leave the EU. In the opening minutes of trade, the FTSE 100 index fell more than 500 points to 5,808.72. Banks were especially hard hit, with Barclays and RBS falling about 30%. Earlier, the value of the pound fell dramatically as the referendum outcome emerged. At one stage, it hit $1.3305, a fall of more than 10% and a low not seen since 1985. Markets in Europe opened much lower as well. The German DAX down by 8.4%, France’s CAC fell 10.1% and Spain’s IBEX down 11.68%.

For our investment portfolios, their globally diversified approach means that, while they have fallen in line with their equity content, they will be down much less than pure UK stock market investments. For those of you who agreed with our advice to move the UK and European portfolio holdings to cash over this period will have benefited from this move.

UK commercial property, which was particularly exposed to a Brexit vote, was impacted by a recent pricing change. Fund prices were moved to a bid to offer basis meaning a 5% reduction in unit price. This was aimed at slowing outflows and protects existing investors.  We felt it wise to wait until property inflows improve and the prices revert to a bid to bid basis. Unfortunately, commercial property values are also down substantially.

Now that we have the result we will ‘keep calm and carry on’. While the market storm rages over the shorter term there is a strong possibility that after this initial reaction markets will recover somewhat and stabilise. We expect UK equities and UK property to be significantly bought by foreign investors as markets and currency values are low.

I believe we took prudent steps to deal with the level of heightened uncertainty by moving, for those investors who responded to our advice, the UK and European assets into cash. However due to the 5% cost to selling out of commercial property we did not include commercial property in our range of assets to de-risk.

We will continue to manage our portfolios with the same rigour and level-headedness as before and adjust portfolios to the changing environment that lies ahead. We are currently working on Edition 25 of our eight portfolios and will be publishing those new portfolios in mid-July.

In this context it needs to be remembered that in the heat of the Brexit campaign, fears were raised which are not necessarily a true reflection of what is likely to happen. So while the Brexit decision is likely to put an additional strain on the UK’s economy, much of the extent of the negative scenarios painted for this outcome during the campaign are likely to have been markedly worse than what actually lies ahead.

In the coming weeks and months, there may be delays to consumer spending, companies’ recruitment and foreign direct investment as the nation and wider global economy digests the decision. In combination, these factors present substantial short-term headwinds to the UK economy. Over the longer term, however, we believe the UK economy can cope with life after Brexit and we remain optimistic about the future outlook. We have a dynamic economy which has adapted to change before – and is now primed to adapt again to whatever change is thrown at us.

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