The EU Referendum Result
The EU referendum has resulted in a decisive vote to leave. Markets are responding to this unexpected news – today there is sharp weakness in the value of Sterling and heavy falls in global share prices. At present the £ is noticeably lower against the $, the FTSE 100 is down around 5% and the FTSE250 Index (more UK-centric) is down by slightly more. Interestingly, the greater pressure is being seen in Continental Europe, with German, French and other markets falling by more than the UK. Spain’s General Election is on Sunday.
Our initial thoughts are as follows :
Now is probably not the time to sell UK domestic focussed investments in favour of international ones. There has been a significant price adjustment already. Global funds and Asian exposure holdings might increase in value as the flip side of Sterling weakness. The Sterling value of reported profits for most FTSE 100 companies will actually increase due to currency impact – 70% of FTSE revenues arise from overseas operations and will be flattered when translated back to Sterling.
The FTSE100 index’s 2016 performance provides additional context. The current market level is little different from the position a week ago as there was a pre referendum rally ahead of today’s falls. The market remains significantly above its mid-February low of close to 5500 reached just a week or so before David Cameron announced the date of the EU Referendum.
Investors will soon begin to focus further on the outstanding issues of global growth, unconventional monetary policies and the outlook for China, all of which we believe will prove equally important in determining the future direction of equity and bond prices.
We do not favour radical, immediate portfolio responses. Now is more a time to reflect, take stock and begin to think about where there may be opportunities which we can then exploit in coming weeks and months. Our perspective remains long term.
The process of withdrawal from the European Union will be long and complex. 'Vote Leave' has previously suggested a stage of informal negotiations before the official two year clock is started and this morning the Prime Minister has passed responsibility for doing this to his successor so little will happen immediately in terms of firing the starting gun.
The UK EU Referendum outcome may have wider consequences on other countries within the EU and so what we assume today as a certainty in terms of the process we will now follow may actually be quite a fluid and rapidly evolving situation. We also recognise that this outcome may reignite other UK constitutional questions.
Updates will follow on an ongoing basis for these developments.
24 June 2016