The Morning After

The polls were right. In the end, what they predicted to be a tight 50/50 decision went the way of the Leave campaign. Financial and betting markets had expected that when people came to put pen to paper a preference for the status quo and the health of the economy would mean Remain would carry the day. In the end it looks like the opposite may have happened. Voters instead preferred to snub the establishment, big business and expert opinions. This has been a shock for markets with sterling moving from 1.50 to 1.34 against the dollar in 6 hours overnight and equity markets and futures falling sharply.

In our April note (Brexit: What we do and don’t worry about) we wrote that:

Our core view is that even if Britain does choose to leave the EU it can still prosper and the economic reality will not – in the longer run – be that different from today. 

We stand by this view. We think that when the dust settles the trading position of the UK will not be that different from where we stand today. This will of course mean there are some difficult negotiations with the rest of the EU and compromise will be needed on some of the key issues for the Leave campaign (such as reducing EU regulations and immigration). But the reality will not be as bad as the rhetoric in the campaign. Some of the sell-offs we see in asset markets in the next few days may yet prove to be longer term buying opportunities.

That said, in the shorter term uncertainty will reign. This is bad for prices in equities and other asset markets. International investment into the UK will fall and major investment decisions by UK companies will be delayed until the picture is clearer. This will slow the economy and will particularly affect areas where integration with the EU and EU legislation is high, such as London and its financial industry. To offset this there will be some cushion provided by the fall in sterling. This will provide a boost for UK exporters as well as UK companies that compete with foreign importers. Net/net though, the immediate impact will be negative.

We will, as ever, negotiate this period as best we can. Though we cannot undo the economic impact of the decision we would however emphasise the following:

• Going into the referendum vote we reduced our equity risk, cut our UK property exposure and added to our non-sterling assets to help make some profits if sterling fell sharply. Though there are limitations on what was ultimately a 50/50 outcome these decisions will help give some portfolio protection.
• All our portfolios are closely risk managed and are stress-tested for market events such as this. They are designed to be able to weather one-off shocks and still have the freedom to profit from any market opportunities that may occur. This is still the case today.
• We remain as global and diversified as we can be. We have deliberately limited our exposure to the UK and the UK economy and retain significant exposures in the US, Asia and in diversified, global funds. In the longer term, we suspect Brexit should have limited effect on the world’s two economic powerhouses: the US and China. What happens to those economies will, ultimately, be a much bigger driver of asset markets and equities than the UK choosing to leave the EU and we continue to invest in them and watch them closely.
• Sometimes shocks such as these can throw up attractive opportunities. We have some cash on hand and are on the look out for investments with strong fundamentals where prices have fallen sharply. We will continue to update you as and when we find them.

As ever, we remain at your disposal should you want to get in touch to discuss any of these issues in more detail.