Gibbs Denley Investment Manager Tom Sparke considers what the Brexit vote means for investors.
The British public have turned out in massive numbers to cast their vote, and the decision has been made to leave the EU. While the immediate aftermath of such an important decision is always uncertain, it is important to bear in mind that there is much yet to be determined and that the UK will remain in its current position for at least 2 years. We remain optimistic that the markets will stabilise and new potential will be realised.
Following the Prime Minister’s resignation this morning, the process of activating Article 50, the trigger for the 2 year period of withdrawal to start, will be done by the new leader, so we have a longer time frame than may have been expected previously.
We have already seen some cushioning of the heavy falls that were sustained this morning as volatility is high in equity markets. The UK’s FTSE 100 lost over 8% first thing but this has significantly pared back. European stocks seem to be faring significantly worse with the EuroStoxx 50 index down nearly 9% in late morning trading. Overnight, Asian markets also fell most potently Japan which lost nearly 8%. It is likely that US markets will follow suit later today.
Mark Carney, Governor of the Bank of England, has already released a statement making it clear that they have significant contingencies and plans in place to ensure stability, including standing ready to provide more than £250bn of additional funds through its normal facilities. We believe that they may wait to enact a further 0.25% cut in interest rates until the July or August scheduled meetings.
The pound has, predictably, been a very significant casualty, plunging to its lowest level against the US Dollar for more than 30 years. However, even in the short time since it became clear that the Leave campaign were going to win, it has risen.
While this has clear short-term negative effects for importers the UK’s exporters could see some benefit and there is the potential for further acquisition activity from overseas companies.
Medium to Long – term effects
A split from the UK’s biggest trading partner (around half of all outward trade goes to the EU) will undoubtedly provide numerous challenges and growth is very likely to slow substantially; estimates are by around 1-2%. The new trade agreements that are initiated will be key to how this will develop in the future, but the EU is unlikely to want to be seen to ‘reward’ the UK for leaving with attractive terms.
It is very likely that ratings agencies S&P & Moodys will downgrade the UK which may hurt government bonds as it may trigger forced selling form institutional investors. At Gibbs Denley we haven’t held these assets directly for some time, so it is unlikely to affect us directly.
Employment is likely to fall as overseas based companies find it less attractive to operate in the UK. The fate of EU nationals in the UK will also be in the balance, but this will not become apparent for some time.
It is early to speculate on the potential effect of property prices but commentators have stated that both residential and commercial property prices may be at risk as overseas investors move away from the UK and into other European cities. We will be keeping a careful eye on this market over the coming years to minimise any decrease in these assets.
There a complex set of changes due to happen over the coming weeks, months and years. As always, our investment committee will be tracking activity and plans to remain cautiously positioned so that we can act speedily on any significant developments.
Follow Tom on Twitter: @TomSparkeGD
This article is for information only and does not constitute advice. Returns from investments is not guaranteed as capital may fall as well as rise. If you are concerned about your investments, please contact your client manager.