30/06/2016
Whether listening to the media or reading the headlines in newspapers you will probably believe that as a result of the Brexit vote you will have lost a lot of money.
Whilst true sterling did fall sharply initially as did UK and European shares these seem to have staged a recovery and in some instances are back to the pre-Brexit levels.
In sterling terms since 23rd June 2016, the Nikkei 225 was up 8.09%, the S&P 500 7.27%, the Nasdaq 100 6.97% and the FTSE 100 0.35% as at closing on 29th June 2016. (Data Source FE 2016).
UK government bonds too have risen strongly.
All of which illustrate the advantages of holding a diversified portfolio.
The press and media continue to be dominated by stories repeating the arguments of the heated and intense referendum campaign. These will continue to run as the leading political parties undertake leadership contests.
It is worth noting that the emergency tax raising budget the Chancellor threatened has been abandoned, President Obama now thinks the USA can negotiate a free trade deal with the UK after all, the French Finance Minister this morning believes free movement across Europe is up for discussion and government borrowing rates have reduced to new lows instead of rising as forecast by Remain. The UK government can now borrow for the first time at under 1% for 10-year money despite some negative appraisals by rating agencies.
Another referendum seems extremely unlikely given the lack of appetite in Parliament despite protests by ineligible voters. The government has accepted the referendum result and any new Prime Minister will do so too. Nor do we anticipate an early General Election. The Labour opposition does not itself think it is in a fit state to fight one, preoccupied with trying to unseat its Leader. The Conservatives, once a new leader and Prime Minister has been elected, will need to focus on Article 50 and negotiations thereafter with the EU.
Mr Cameron stated before the 2015 election that he would retire as Prime Minister before 2020, though this has now happened faster than everyone had anticipated. UK precedent is for governing parties to change leaders but not to hold immediate elections to validate their choice. John Major left it eighteen months before winning his own mandate. Gordon Brown left it for more than two years before losing.
Investment manager, Charles Stanley has run a good and a bad Brexit scenario. It believes the good scenario is more likely. It is important not to exaggerate the economic impact of Brexit, particularly in the next year or so when the process takes time to achieve. This is an important political event with a big impact on UK and European politics, but if carefully managed it will have only a modest influence on the economic performance of the UK and the EU in the short term. People have argued that there could be two adverse effects, leading to lower growth or even recession. The first is some reduction to UK trade. For the next few months this seems unlikely, as all current EU arrangements remain in place. In the medium term, the impact will depend on whether the UK retains access to the EU market on something like current terms, or has to fall back on World Trade organisation terms under most favoured nation status. The latter implies a new low average tariff and related barriers with a total cost considerably less than the advantage so far created by the falls in sterling. The second is confidence in the UK. If a serious number of companies decide to locate to the continent from the UK and if the flow of overseas investment into the UK reduces sharply the UK will find it more difficult to finance its current account deficit and there will be some reduction to growth.
Time will tell. Similar fears were expressed when the UK voted not to join the Euro, but they did not materialise.
The events of recent weeks remind us why we recommend diversified portfolios with a spread of investments to offer both protection and potential gain in different conditions.
We will continue to keep you advised as the government tries to catch up with events and sorts itself out before beginning the slow process of UK withdrawal from the EU.
In the meantime if you have any questions do not hesitate to contact us.
