Brexit

July 2016

As you will be aware, the result of the EU referendum was announced early on Friday, 24 June 2016 with a vote in favour of the UK leaving the EU. The result of the vote has led to increased political uncertainty, as well as volatility in investment and currency markets.

So what happens next?

You may have heard many references to Article 50. This refers to Article 50 of the Treaty on the European Union, which sets out the mechanism for leaving the EU. The UK will stop being an EU Member State two years from the date of notice. In fact, this period can be shorter if the withdrawal agreement is finalised, or can be extended further.

David Cameron confirmed that it was not his intention to trigger Article 50 before he steps down as Prime Minister in order to enable his successor to conduct the negotiations. Now that Theresa May has formally been elected as leader of the Conservative party and next Prime Minister, we should get an early indication of when the government intend to trigger Article 50.

In the aftermath of the vote, George Osbourne, the Chancellor of the Exchequer also moved to reassure the country. I have included a few excerpts from his speech below, for your information…..

I want to reassure the British people, and the global community, that Britain is ready to confront what the future holds for us from a position of strength. That is because in the last six years the government and the British people have worked hard to rebuild the British economy.

We have worked systematically through a plan that today means Britain has the strongest major advanced economy in the world. Growth has been robust. The employment rate is at a record high. The capital requirements for banks are 10 times what they were. And the budget deficit has been brought down from 11 percent of national income, and was forecast to be below 3 percent this year. I said we had to fix the roof so that we were prepared for whatever the future held. Thank goodness we did.

As a result, our economy is about as strong as it could be to confront the challenge our country now face…

First, there is the volatility we have seen and are likely to continue to see in financial markets. Those markets may not have been expecting the referendum result — but the Treasury, the Bank of England and the Financial Conduct Authority have spent the last few months putting in place robust contingency plans for the immediate financial aftermath in the event of this result….

McHardy Financial Commentary

Following initial disruption in financial markets, there will be a period of reflection as all parties come to terms with the result. In the meantime, the predicted fall in sterling will drive up import prices, potentially creating inflation and a replay of the 2010/11 cost of living squeeze. But the fall in sterling will help exporters and gives the UK a competitive edge, relative to the EU and US.

Following an initial negative reaction in most of the major stockmarkets around the world, markets have largely recovered those losses, and the UK market has somewhat surprisingly risen sharply over the last couple of weeks; although in the UK market we have witnessed contrasting fortunes within different sectors – with some banks, insurers and housebuilders initially suffering heavy losses, whereas international earners in oil & gas and consumer goods sectors have seen healthy share price rises.

This type of volatility is an inevitable part of investing. Movements in stock prices can be extreme, and whilst it is concerning for investors, it is essential to consider the medium to long term prospects, instead of focusing on short term volatility. Most of our clients’ investments are exposed to both the UK and global markets, as well as being invested in different asset classes, and with most of the major currencies strengthening against sterling, this has provided an uplift in the equivalent sterling valuations on overseas investments. Also, the UK bond (fixed interest) market has rallied and has provided for an increase in value in the fixed interest investments in our clients’ investments/portfolios. This underlines the importance of investing in a diversified portfolio, both in geographical terms and in terms of spreading investments across different asset classes. Property funds have suffered a high rate of withdrawals and most of the major property funds have found it necessary to suspend trading to allow them to sell down assets in an orderly fashion, and at the optimum prices.

As we have seen in the past, it is rarely in the best interests of investors to try and “time the market”, by coming in and out when markets hit periods of volatility. Staying invested and pursuing a longer term strategy is far more likely to produce better returns over the medium to longer term.

If at any stage you wish to discuss your investments, or have any concerns, please feel free to call your adviser.