Reactions from the people that matter.
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Lombard Odier Investment Managers
Jan Straatman, Global Chief Investment Officer, and Salman Ahmed, Chief Investment Strategist:
Brexit has happened, bringing unlimited uncertainty and permanently redrawing the UK, European and global investment landscape.
With markets increasingly pricing Remain in the days prior to the referendum, global equities are down sharply, matching or in some cases exceeding the dark days of 2008. Sterling is at the centre of the storm, with a nearly 10% hit against the US dollar since Thursday’s close. Not surprisingly, traditional safe havens such as government bonds in advanced economies, the Japanese yen and gold are rallying as investors take flight to safety.
In terms of pure politics, the turmoil for the UK and the European Union has just started. David Cameron announced his resignation but we expect the coming weeks and the upcoming Conservative leadership election to be tumultuous for markets and sterling.
Longer-term, our new base case following the Leave vote is ultimately a Norway-style deal for the UK. Many significant and uncertain road blocks lie ahead before such an outcome can come to fruition. First and foremost, with Scotland voting strongly in favour of Remain, there will be pressure to call another referendum regarding its position within the UK. This adds another layer of uncertainty for both the EU and UK specifically. Uncertainty around the future shape of any deal would likely have to run concurrently with the strong possibility of a break-up of the EU and the UK.
Contagion to Europe is possible as conjecture increases about the domino effect and as markets question which other countries may also opt to leave the EU. With the Spanish election looming, we have to wonder if Brexit will give further impetus to the far right in Europe.
Short-term implications – more volatility and more policy easing
Turning to markets, we expect the volatility shock to prevail in the short term as sentiment and generalised uncertainty take over from fundamentals. We expect major central banks to step in with outright monetary easing or at the very least provide liquidity. For the ECB, extension of the current QE programme is now a given and the US will not be immune either. The potential drag on the US economy will call into question the certainty of an interest rate rise in July and even for the remainder of 2016. Using 2008 as a template, we expect usage of swap lines to ease cross-currency funding pressures as liquidity is provided to avoid any possibility of a run on the banking sector.
Focusing on the Bank of England, the central bank is in a very tricky situation. The sharp macro imbalances facing the UK economy – the twin deficits – will continue to play out in the form of sustained pressure on sterling. Indeed, to protect the currency and the country from a balance of payment crisis, we think a sustained QE programme is unlikely to be the correct policy response. A recession is a near certainty and we expect inflation to rise sharply on the back of the weaker currency.
More broadly, the key question facing the markets is whether any central bank actions would be enough to calm the markets. Here a lot will depend on political developments and the extent and scope of any action, which means making precise predictions at this stage is likely to be extremely difficult.
Our Global macro views – Japanisation of Europe likely to entrench further
A Leave vote further strengthens the foundations of our Japanisation of Europe base case as we continue to foresee weak global growth, widespread disinflation and lower interest rates.
Already, expectations of central bank action and a safe haven demand surge have pushed government bond yields in advanced economies lower across the board. This is a reflection of the low growth world we are seeing.
Looking ahead, once the dust starts to settle and short-term volatility subsides, we think strong dislocations as a result of the mayhem will start to become visible. Emerging markets will benefit strongly given attractive valuations and next to zero direct sensitivity to the UK vote. EMs will also benefit from additional liquidity provisions from key central banks. This will also likely energise the ongoing demand for yield in a low return world and the need for a fundamentally driven quality based diversification, that is a prudent search for yield.
Politics, not politicians in driving seat as Europe is reconfigured
The implications of the decision by Britain to leave will be far reaching. Europe will likely be reconfigured as a major EU country’s electorate has rejected the status quo. More importantly, there is visible and palpable resentment towards established institutional structures and thinking frameworks. This has been brewing since the 2008-2009 financial crisis and is shaping long-term political outcomes. We think this creates unlimited uncertainty across social, economic, financial and security dimensions and the months ahead will be critical to assessing the direction of this “brave new world”.
Wellian Investment Solutions
Today, as the UK voted to leave the European Union, Wellian Investment Solutions gives its view on the impact of this decision on the investment industry. The DFM had said in advance of the vote it had been adopting a balanced approach with diversification across a wide range of assets and investment strategies.
At this stage, Wellian has said that it is difficult to predict a long term outlook, however, the only immediate certainty is the extreme volatility in the financial markets prompting huge price swings across equity, currency, bond and commodity markets. Such volatility will require continuing close management and careful analysis over the weeks ahead as Sterling falls to its lowest since 1985, the DFM has said.
As the pound reaches a 30 year low against the dollar, Richard Philbin, Chief Investment Officer of Wellian Investment Solutions (part of the Harwood Wealth Group plc) comments:
‘Whilst it is not our position to debate the rights and wrongs of this historic outcome, we are acutely aware of the fact that this verdict has raised many poignant and serious questions. Of these questions, the ones to have the most immediate impact on our industry include whether or not there will be an interest rate hike, will businesses turn away from the UK market and will the M&A market suffer even more than it already has done?
‘The answers to all of these questions are at this stage, on this list of the many unknown outcomes of a Brexit. However, we would like to reassure our clients by reaffirming that we have recently been focussing all of our attention on diversifying our portfolios whilst simultaneously leaving plenty of room for wealth creation; regardless of the result. Furthermore, what is also reassuring is that the fall in Sterling will actually act as a diversifier. We have substantial international holdings in most of our portfolios and a 10% fall in Sterling will immediately boost their values by the same amount (excluding any movement in the underlying asset). Many of the UK’s best known companies are very international and a fall in Sterling will make their goods and services immediately more competitive overseas. We also need to remember that our Sterling based assets such as gilts, property and UK fixed interest won’t change in value to our Sterling based clients; neither will the income they are receiving from it.
‘Today and in the weeks ahead we will be spending lots of time thinking through the implications from an investment point of view. We acknowledge that this is not an issue that will be purely restricted to Europe; but one which will have a significant ripple effect across the global markets, which is why it is so crucial for us to continue to apply a long term view to our investment strategy. We wish to reiterate that investing; by its very nature, is rarely all plain sailing, even at the best of times and there will always be moments of risk and uncertainty like these. One only has to refer to the history books to see that we have often navigated through turbulent market risks and that in hindsight, these risks rarely seem as bad as they appeared at the time. The secret of our success in riding these storms has always been to design our portfolios with a long term view in mind and our diversification focused strategy has delivered excellent long term returns to our investors. We have been very aware of the implications of Brexit as well as the other investment risks such as the slowdown in the Chinese economy and the upcoming election in the US for quite some time. As such, our portfolios remain well diversified and invested with some of the City’s brightest minds to take advantage of opportunities as they unfold. As always, we will continue to keep our clients informed of our decisions as and when they arise.’
Insignis Asset Management
Paul Richards, Chairman: “With the increased volatility a Brexit vote brings, we see cash positions increasing significantly in the short and long term as both individuals and institutions not only switch out of more volatile asset classes traditionally associated with pension funds, but also accumulate cash based on delayed spending or investment plans. The two key motivations for this behaviour are capital preservation and the diversification of counterparty risk. As markets open they demonstrate classic “flight to quality” patterns. Gold higher, Gilts higher in price, lower in yield and bank stocks taking big downward moves as investors attempt to reduce and/or diversify their exposures.”
Equities Team, M&G Investments
Ritu Vohora, Investment Director:
“Shockwaves of the UK’s decision to leave the EU reverberated in Asia overnight as investors fled to traditional safe havens, including gold and the yen. This has continued in the UK and Europe as the Eurostoxx 600 opened down around -5.5% (at time of writing down 8.2%). Risk assets and in particular financials and housebuilders were hit hard as investors positioned defensively.
“US equity futures are indicating the S&P 500 may fall by 5% – there is a limit on the S&P Future which cannot trade below 1999 before US cash opens. Additionally, we’ve seen a trading halt on some European stocks in light of the vote.
“The political and economic uncertainties are likely to require an increase in the equity risk premium as markets absorb the political and economic ramifications in the days and weeks to come. However, brokers noted that there’s been a big build-up of cash in recent months, which should be invested when markets settle.”
Indosuez Wealth Management (Credit Agricole’s private banking arm)
Marie-Owens Thomsen, Chief Economist:
- The vote to leave the EU is the start, not the end, of a process that could take up to a decade or more.
- In addition to the detrimental effects of prolonged uncertainty and the opportunity cost of spending time and money on these negotiations instead of more pro-growth policies, one can expect the UK financial industry, car manufacturers, and farmers to be particularly hurt, at least until a new framework emerges for the UK, in 2019 at best.
- The EU and all its remaining members, especially Ireland, will also lose out: the other member countries will have to pay the UK contribution (if no solution similar to Norway and Switzerland); the EU will lose cohesion; and lose internal opposition – the UK has been an important initiator of reform within the EU.
- UK recession but NO global recession. The UK will import inflation through the weaker currency. The current account deficit will worsen because imports will become more expensive and services exports – the one UK strength – will suffer.
Hence, the UK will likely revert to a state similar to that prior to the 1973 accession to the European Union, with a diminished role in the world economy and trade, and a heightened risk of balance of payments crises.
- The world is not exposed to the UK as it was to subprime debt.
- There is no reason to assume a global shock to the business cycle.
- Central banks are likely to adopt 2008 style policies which should make this market correction the best buying opportunity since 2009.
Hence, near-term, the exit is a buying opportunity for extra-UK markets. Longer term it suggests lower potential growth rates and a more difficult political context than if the UK had opted to Remain
What does this mean for the Fed / US / Gold?
- We now change our call on the Fed and no longer expect a rate hike in July and possibly not before the end of the year. However, we do not expect a rate cut in the US.
- It is possible that other central banks will cut rates, and that those with negative policy rates will move deeper into negative terrain. Negative rates are also likely to be extended to affect more of banks’ reserves.
- Given that the global business cycle is now positive, with some 3% global GDP growth y/y (PPP), these exceptionally accommodative monetary policies are more inflationary today than in 2008.
- This makes gold particularly attractive as a safe-haven.
- Gold had already broken its bear trend on stronger demand in the face of slowing supply growth, and we had USD 1350/oz as a target.
- The UK exit adds to this positive momentum and if the USD 1350-1360/oz level is broken through, we will be looking for USD 1400/oz as the next target.
Implications on FX
- Sterling is obviously the biggest loser in the wake of the exit vote.
- The euro too could suffer in the current context and if the ECB cuts rates again; the next meeting is 21 July.
- The Bank of Japan meets on 29 July and would likely cut rates.
- The Swiss National Bank meets quarterly but can move at any point in time.
- Regarding the euro, one should not forget that the euro zone is ultra-competitive, running a current account surplus of 3% of GDP, and the European Union actually has the world’s largest current account surplus in US dollar terms, ahead of that of China. It will only be larger now that the UK deficit will be excluded.
- US dollar strength will be limited by the lower likelihood of Fed rate hikes, and by the current account deficit which is the largest in the world in US dollar terms, although a rather modest 2.6% of US GDP.
- The Mexican peso has become synonymous with “hedge against everything”, and short positions have been building up ahead of the UK vote as well as in anticipation of the US presidential elections where Mexico is seen to suffer the most should Donald Trump capture the White House.
- With the more accommodative monetary policies around the globe, the dynamics for bonds are now less bearish.
- We used to highlight the fragility in the short end of the US yield curve but that now looks less acute.
- There is in this context still value in bond markets, but the relative value with respect to equity markets has arguably dropped – making equity more attractive versus bonds as bond yields fall.
- UK bonds will arguably rally (prices rise, yields fall).
- Other bond markets are likely to follow a similar pattern.
- There is an argument for global yield convergence beyond the risk-off mode that will likely favour safe-havens, as investors will chase yield further afield.
- Along with the UK market, the Swiss and Japanese markets will also suffer from the appreciation of the latter two countries’ currencies. That appreciation is unlikely to cause a recession in those two countries but since the stock market indices are heavily weighted in exporting companies the impact on the stock markets is greater.
- The more accommodative monetary policy stance will be supportive for stocks outside of the UK.
- As the world is not exposed to the UK as it was to subprime debt, the UK leave vote is unlikely to have a major impact on the global business cycle, although the UK could well suffer a bout of stagflation.
- In this way, the aftermath of the Leave outcome could represent the best buying opportunity of markets outside of the UK since 2009.
- In our Discretionary Portfolio Management we are currently neutral in our exposure to risk assets, and will monitor developments and spill-over effects before taking any further action.
Anderson Strathern Asset Management
Alec Stewart, CEO: “Like the pollsters and bookies, we have been surprised by the referendum result.
“However, at Anderson Strathern Asset Management we have always been conscious of the possibilities and positioned ourselves accordingly for the longer-term. Early market moves show some volatility across all asset classes (not least currency) and global regions.
“With the possibility of a ‘leave’ vote in mind, we retained large positions in UK and global multi-national companies in our portfolios, as we believe the truly international nature of their businesses will offer some insulation from any uncertainty resulting from the referendum result.
“Our detailed approach to diversifying client portfolios across different asset classes should also provide some stability. Market reactions can be emotional and therefore extreme in the very short run. This supports our long-term approach to investing client monies and, with all longer-term decisions, we strongly believe that calm, sensible consideration should be given.
“By taking a diversified approach over longer timeframes we have helped many of our clients to weather other extreme and rare events like the 2008 global financial crisis for example. It is time to see beyond the “white noise”.
“Inevitably, the devil will be in the detail and, as ever, volatility creates exciting and interesting opportunities across a number of asset classes, regions and sectors.
“As we have always advocated, long-term objectives can only be met with long-term solutions. That cannot change. In the meantime, my advice: ‘keep calm and carry on’.”
AXA Investment Managers
David Page, Senior Economist:
- We revise our UK GDP forecast for 2017 to 0.4% from 1.9%
- Expect easing in monetary policy before the year end – we estimate two 0.25% rate cuts and between £50-100 billion of QE
- Expect subdued investment and foreign direct investment to weigh on GDP
- Expect renewed pressure on households as real disposable income growth slows
The UK economic outlook is likely to be severely affected by the decision to leave the EU. The economy looks to have sagged under the uncertainty of the referendum itself, with deferral of activity. The decision to leave the EU looks likely to make much of this deferral permanent. We expect subdued investment and foreign direct investment into the UK to weigh on activity. This is likely to be supplemented by the sharp tightening in financial conditions in its wake. Moreover, an expected relative boost to the short term inflation outlook, against rising uncertainty for employment is likely to renew pressure on households. We expect UK GDP growth to slow significantly from the 1.9% we forecast in a Remain scenario. Our expectation is for quarterly growth to fall back towards zero around the middle of next year. Accordingly, we change our forecast pencilling in GDP growth of 1.5% (from 1.8%) in the UK for 2016 and 0.4% in 2017 (from 1.9%).
We continue to believe that the Bank of England will provide support for the UK economy. Governor Carney spoke this morning to reassure financial markets. He stated that the Bank stood ready to provide liquidity support in sterling and FX, if necessary. He reiterated that the commercial banking system was significantly more resilient and better capitalised than in the past. And he said the Bank would “assess economic conditions and consider other policy responses”. We have long forecast that Brexit would consider an easing in monetary policy, we estimate two successive 0.25% rate cuts and the likelihood of £50-100bn quantitative easing (QE). The May Inflation Report was more circumspect in whether it would be necessary to provide additional monetary policy stimulus. The precise scale of financial market reaction is likely to determine whether the Monetary Policy Committee begins to ease policy in the short-term (August) or November, our own view is that the latter is more likely.
Financial market reaction has been severe. Sterling has fallen sharply. It currently trades at $1.38 to the US dollar (-8% on the day), but had traded as low as $1.325 (-12%); sterling is also lower against the yen (-11%) and the euro (-6%). Equity markets have also suffered a major blow with FTSE 100 down 5.5% on the day and the more domestically oriented FTSE 250 down 8.6%. UK gilt yields also fell sharply: the yield on 10-year gilts opened 35basis points (bps) lower, but is currently trading at 1.10%, 27bps lower. Yet reaction has not been confined to the UK. Global stocks have suffered a sharp reaction to the UK’s decision. The Euro Stoxx index is down 9%, Japanese stocks closed 8% lower. Global bond yields are also sharply lower with US Treasuries down 20bps to 1.54% (35bps at worst) and German bund yields down 16bps to -0.06%.
The UK voted 52-48 to leave the EU, with a relatively high turnout of 72%. But regional differences were strong. Scotland and Northern Ireland voted to remain in (62-38%) and (56-44%) respectively. England and Wales both voted to leave. Within England, London and large northern cities like Manchester and Leeds voted to remain, but otherwise the decision to leave the EU was far more widespread than expected.
In the wake of the decision, Prime Minister David Cameron announced that he would stand down urging “fresh leadership” before the Party Conference in October. He said it would be down to the next Prime Minister to activate the Article 50 Treaty exit clause, which would start the formal countdown to the UK’s exit. Political uncertainty is high in the UK. Prime Minister expectations are high for a Brexit supporting leader, with Boris Johnson and Michael Gove frontrunners. Some are speculating that the Labour party may also consider a leadership challenge. More broadly, SNP’s Nicola Sturgeon has already said that the people of Scotland “see their future as part of the EU”. This suggests the revival of the Scottish referendum issue, although difficulties given the price of oil and the fact that the SNP could not afford to lose a second referendum, may delay this until towards the end of this Parliament. Northern Ireland’s vote to remain and the risks of the imposition of a hard border being reimposed between the Republic and Northern Ireland could increase tensions again there.
Dominic Rossi, Global CIO of Equities, comments: “The implications of the vote to leave are two-fold; we are in the midst of both an economic and a political shock. I believe the political shock will be greater than the economic shock.
“From an economic point of view, we can expect lower growth in the UK and across Europe, and that is now being discounted in equity markets. We also expect a mild recession in the UK over the course of this year and into next year. However, what matters more is that political risk premia will now rise around the world and this implies lower valuations. Today’s result will set off a domino effect of political risk. Whether it’s the US election later this year or the French election next year, investors are going to be far more cautious.
“This morning we have seen a knee-jerk reaction from markets, which were poorly positioned ahead of the vote. We may have not seen the end of this; as the dust settles and the fundamentals assert themselves, it’s likely that sterling will continue to weaken against the US dollar and the Euro.
“For investors, diversification is key. This means having a balance between sterling and non-sterling assets, alongside bond assets which will provide a store of value. It’s also important to remember that there will always be large global organisations with very large balance sheets which in these times offer savers some protection.
“As investors, we use very difficult times like this to buy those sound sustainable businesses that we want to own at a discounted price. However, markets will remain volatile in the short term, so it is essential to tread carefully.”
M&G Income Allocation Fund
Andrew, Fund Manager of the M&G Income Allocation Fund, on the market’s reaction to the UK’s vote to leave the EU and David Cameron’s resignation as prime minister:
- There have been significant movements across global financial markets overnight and this morning – some of these moves seem rational, but others may be an over-reaction.
- Confirmation of the referendum result removes some uncertainty and creates some other uncertainties. There is always uncertainty but markets tend to react most when we can put a name to it. We have to admit that at this stage, there is a lot that we do not know, so let’s focus on what we do know – how asset prices are moving and how that relates to a broad range of factors likely to influence the global economic outlook over meaningful time horizons.
- As global investors, we have to step back from the enormous media attention on this topic here in the UK and Europe and ask whether our perspective has changed on the global outlook. So far, from that perspective, we can say that the ‘story’ – in terms of a narrative of broad political disaffection across many regions, not just the UK – has moved along a bit. Other than that, there is very little we can know.
- Nobody likes political uncertainty but there is little sign that this represents a change in regime in that this is not about changing to anti-capital models. Therefore, we should question it when we see markets behaving as if that is what’s going on.
- We have to think carefully about what market movements this ‘new’ news justifies. It might be sufficient to justify a 10% overnight move in sterling versus the US dollar, but does it justify a decline of 7-8% in Japanese banks or 6-7% in Portuguese bonds in a single day? Neither of these movements have taken pricing to levels outside of a range already seen year-to-date, but the speed of the moves looks like indiscriminate panic.
- How much trade agreements between the UK and EU really have to do with the earnings of Japanese banks? And doesn’t this result make it seem more likely the ECB will do everything in its power to ensure peripheral sovereign bond yields do not spike to levels that could cause instability?
- European stock markets have seen double-digit declines this morning. This is unsurprising give that the DAX fell 7% at one point in the run-up to the referendum, so we would not be surprised to see bigger moves than that now that the ‘Leave’ result is confirmed. However, declines of that magnitude may represent an opportunity.
- We are watching carefully for buying opportunities in areas which are selling off too aggressively, away from the ‘epi-centre’ of events, if we believe markets are over-extending this news as a ‘negative’ for everything globally.
- On the other hand, we would be likely to reduce any holdings in things which are rallying to unjustifiable levels, such as ‘safe-haven’ bonds. US Treasury yields have fallen sharply, but what will affect that more over the period ahead – Brexit or Fed policy in the long run? And will Fed policy be influenced more by Brexit or facts about the domestic economy, such as the employment rate being consistent with expansion?
- In European bonds, spreads on core bonds are narrowing and peripheral bonds widening – indicating risk-off and potentially panicked sentiment.
- In summary, while this is a significant development, we must be careful of drawing a straight line between this one event and saying that the world has changed in a singularly negative way. We have to be wary of over-simplified conclusions that do not seem well-considered and suggest that this development outstrips everything else in the global economic outlook. There will be many pushes and pulls for the global economy over the next few years – some of them will be about EU trade agreements, some will be about Spanish politics, but some will be about more durable things such as long-run US policy. We have to make sure we are always weighing up all of these things and being mindful of the different risks and opportunities they present in terms of how they affect asset prices.
Stuart Law, founder and CEO, said: “Brexit will create a big opportunity for Assetz Capital’s investors as bank interest rates on business loan are likely to rise – making banks less competitive.
“Banks lending volumes are now reduced and at the same time, they are likely to lower their savings account rates even further. This will allow us to continue to grow strongly and deliver more lending to quality businesses who can provide us with solid loan security and also deliver more interest to our lenders.
“We have already lent more than £120 million to the British economy backed by what is principally strong property security at modest loan to value, and as a result our lenders have earned approaching £12 million of interest since 2013. We expect this to continue but the credit team will be even more careful on the quality of businesses we lend to as we navigate the inevitable wobbles created out of the Brexit. Hard security on loans will be even more important but then that is our speciality.
“We have never lent on overpriced housing developments in the prime London market as we had expectations of this type of set-back however we will continue to work with experienced developers of modestly sized and priced schemes in normal locations from London suburbs all the way out to the provinces.”
“The outcome of the UK referendum took investors by surprise. Today will feel ‘crashy’ as insurance contracts are triggered. The next steps are contagion risks and policy reaction.
“A historical day lies ahead of us – UK voters decided to leave the European Union. Despite close polls this is a major surprise to investors given the odds earlier on. The reaction will go in waves. The first wave is rolling and refers to the unwinding of insurance contracts, in particular on the currency side. This will take place mostly today and maybe also some trading days next week. The second wave will be about contagion. Is this the end of the European Union, and other similar questions. The only way of reading this is to monitor bond spreads of peripheral European sovereigns in the coming days. Should they rise, the market is preparing for break-up. The third wave will be about policy reaction beyond the initial comments of European politicians and mitigating central bank interventions. This will take weeks if not months. The outcome of the UK referendum took investors by surprise. How to cope with this? 1) Stay calm, this is not the day to act in a major way, 2) stick to quality and 3) look out for bargains in assets you always wanted to own but that always looked pricey.
“Forex markets are showing typical shock reactions today, all the more since in the past days they probably had become too comfortable with the idea that the Brexit would be rejected. The Sunday press will surely offer a detailed analysis of the surprising outcome of the vote. It is still too early at this stage to discuss about what the events mean for the UK political landscape and stability, how or when Article 50 of the Lisbon Treaty will be triggered, or what it means for the European Union as a whole. On the currency markets, the pound sterling is suffering the most, as expected, while safe havens such as the JPY, the USD and the CHF are facing upward pressure. While for most currencies the shock could abate in the next few days, we expect the pound’s weakness to continue, as fundamental factors will kick in, such as the expected meltdown of foreign direct investments.
“As already indicated by the futures market the UK equity market could see a substantial setback today. Setbacks in the UK will likely affect other equity markets in Europe as the relationship between UK and European equities must not be underestimated and Eurozone markets are the most interlinked in terms of economics and politics. Also, discussions about a breakup in the eurozone, which are flaring up on a more or less regular basis, could be fuelled again.”
Views from their strategists and portfolio teams:
- The UK vote to leave the European Union (EU) sets in motion a long period of political, economic and market uncertainty for the UK and EU.
- We see sell-offs in global risk assets creating buying opportunities.
- The vote does not change BlackRock’s management of client assets in Europe. We do not foresee any disruption to how we manage portfolios.
The UK’s momentous decision to leave the EU brings long-lasting political and economic consequences. We expect European leaders to focus on fending off domestic populist movements emboldened by the British exit and on preventing the entire EU edifice from falling apart. This points to a tough negotiating stance toward the UK and less focus on much-needed structural reforms. We expect attitudes on immigration to harden, and see the risk of a protracted standoff feeding uncertainty.
David Cameron has announced he will resign as UK prime minister by October, setting the stage for a Conservative leadership election this summer. This race will likely be dominated by Leave supporters, increasing uncertainty and the risk of emotive exit negotiations. We see a Scottish independence vote as back on the table.
We expect the UK divorce to be messy, drawn out and costly. It involves unpacking UK and EU laws, and striking trade deals with a spurned EU and the rest of the world. We expect potential losses in services exports and investment flows to overwhelm many benefits of lower payments to EU.
We see a weaker euro over time and pressure on European shares, credit and peripheral bonds such as Italian government debt due to likely European job losses and lower growth. We expect limited pressure on government budgets, however, as high-quality government bonds are in demand in a low-rate world.
The Bank of England’s first priority will be to provide ample liquidity to avoid any funding stresses, in our view. The magnitude and volatility of the British pound’s fall will likely dictate further responses. We expect the central bank to cut its 0.5% policy interest rate to zero soon, and see it returning to quantitative easing rather than pushing rates into negative territory. We expect credit rating agencies to quickly adopt negative outlooks for UK government bonds, with downgrades to follow.
We see the vote leading to declines in global shares and other risk assets. Yet indiscriminate selling could translate into opportunities. U.S. and Asia markets are only marginally affected by the UK’s exit from the EU, and are supported by a mix of easy monetary policy and economic growth. In the UK, we expect the large-cap FTSE 100 Index to outperform the more domestically focused FTSE 250 Index. A UK currency drop benefits large companies with overseas earnings, whereas domestic sectors such as homebuilders, retail and financials look vulnerable.
Commercial property values could fall around 10% over the next year, led by declines in oversupplied central London, we believe. We expect sharply reduced tenant demand and a shift toward shorter lease terms. Overseas investors are set to demand a larger risk premium, or more compensation, for holding UK assets. We see little risk of debt-forced sell-offs, however, as developer financing is mostly long term.
Baring Asset Management
Marino Valensise, Head of Multi Asset & Income at Baring Asset Management: “The Leave campaign has succeeded. As the result came in, sterling plummeted 11% to a 30-year low, despite having rallied to the year’s high the night before.
Now Britain will start negotiations for its exit from the European Union, and this is expected to take two years (time available under the Lisbon Treaty) or even longer.
The political issues will not be contained to the UK. Europe is likely to struggle, and the success of the UK in exiting the European Union may well lead to a rise of nationalist movements across the continent, each demanding a referendum of their own.
It is unlikely that a quick negotiation or sweetheart deal can take place. While certain players might be interested in this, the political calendar makes this unlikely. The rest of this year will largely be taken up with a leadership election for the UK Conservative party, and potentially a general election too. Next year sees elections in both France and Germany. So it is unlikely that meaningful negotiations can start before 2018, raising the prospect of a long period of uncertainty.
In relation to economies and markets, over the coming weeks, central banks around the world will respond to what will be an uncertain and deteriorating environment. In the US, the chance of a further rate rise from the Federal Reserve this year has disappeared.
While the reality of this Leave vote has surprised markets, we had taken steps to protect our portfolios and prepare for such an outcome. Over the past year we have cut back our UK equity exposure significantly, especially in the more domestically orientated FTSE250 space. Additionally, ahead of the vote, we reduced our property exposure and are considering doing more.
However, we carry a significant position in European equities, which have been a preferred asset class. These have been marginally trimmed in the last few months, given the risk posed by a potential Brexit.
Our currency exposure has proven important in managing the fallout from Brexit. Having approx. 30% outside of Sterling, we have de facto hedged much of the position in risky assets. Our increased foreign currency exposure has allowed us to offset losses generated in equity markets. The FTSE 100, EuroStoxx 50 and Nikkei are all down between -7% and -12% as we write, and our portfolios have fared much better and withstood the worst of the fall.
During extreme market events such as this, an ability to diversify across a range of asset classes and currencies comes to the fore. Alternatives have provided useful ballast in our portfolios, with precious metals having performed particularly strongly in Q1 2016. Our use of alternatives might continue as further market stress is expected.
With such uncertainty in the outcome of the referendum, we increased our cash holdings as well and also built a higher exposure to income-generating assets such as US High Yield.
We believe this vote is extremely damaging to the UK economy. We will be reducing our UK property position, as the asset class is seen at risk. How we next deploy the proceeds is currently being carefully considered.
A weaker currency will – in the long run – benefit multinational companies with overseas revenues, which report in Sterling, as their profits will receive a boost. We will look at FTSE 100 companies with interest.
2016 has already seen the rebound of US high yield credit and we believe that this income-generating asset class will continue to be a good investment opportunity. The themes of carry and income remain intact. In time, as we transition into a risk-on environment we are likely to increase our high yield exposure first and look to other asset classes, such as emerging market bonds, to provide additional income.
There is no doubt that the next two years will be difficult, as Britain attempts to negotiate favourable trade agreements with former EU allies and manage a weakened currency.
Finally, while the vote has been cast, how Brexit plays out across different asset markets remains less certain. Today is not the day for drastic decisions.”
The Pensions and Lifetime Savings Association (PLSA)
Joanne Segars, Chief Executive: “This result is an historic day for the UK and Europe.
“The ramifications for UK pensions of the UK’s decision to leave the European Union will start to become clear over the coming weeks and months.
“Much will depend on the precise nature of our future relationship with the EU, which may mean that some aspects of UK pension provision continue to be influenced by the EU. In other areas, UK pension law may need to be disentangled from EU legislation.
“The PLSA will continue to play a leading role in ensuring the pension fund perspective is clearly heard and understood in the uncertain times ahead to ensure that the needs and interests of pension funds and millions of pension savers are protected.
“It is essential that the UK government and policymakers in Brussels now act swiftly and decisively to manage current volatility and announce a clear plan to renegotiate our future relationship with the EU.”
Giles Williams, Financial Services partner, said:
“Although it was well known that the referendum result would be a close call, the leave vote will send a shudder through the financial services industry. The harsh reality of the probable changes to passporting arrangements and market structure, our clients’ operating models and engagement with the wider economy across Europe will now sink in. Of course we will see short term volatility which is a natural consequence of a vote of this nature. The critical issue is how this will play out going forward.
“The Financial Services industry needs to quickly develop its ‘asks’ of politicians to make sure that financial services can continue to play its crucial role in the wider economy. It is critical that the negotiating teams fully understand the implications and consequences of dislocating European capital markets, banking, insurance and asset management on the economy both here in the UK and in Europe. .
“In terms of priorities for the economy, the ability for Europe to access London’s well developed markets in insurance, securities and banking is critical. Equally UK-based firms must be able to continue to provide financial solutions to the market, corporates and individual citizens across Europe and internationally.”
James Stantoncomments as sterling fell to a three decade low in the wake of Britain’s decision to leave the European Union.
He said: “The Brexit victory has dragged the pound down, as was expected. But the scale of the drop has been a shock – it plummeted to its lowest level since 1985.
“However, moving forward as the dust settles, it can be expected that GBP/USD resistance could be found at 1.35 with support levels found above 1.38. Similarly, I believe that GBP/EUR will soon test levels at 1.20.
“In the longer term, I think that the Euro will be fundamentally weakened by Brexit, as it could serve as catalyst for full EU break up as other member countries calling for referendums.”
“ This news was always going to create a huge panic sell-off and bearing in mind the wider impact this will have on the Euro, many sensible investors will be seeking to look to cash in on a Brexit-battered pound.
“UK banks are stress-tested to deal with this kind of news, as Mark Carney, the Governor of the Bank of England has said this morning, and will offer a lot of support during these testing times.
“We can expect the pound to begin to stabilise over the next week, thereby creating better selling opportunities for investors and, indeed, the wider public.
“I strongly believe GBP/EUR will recover back nearer to the 1.30 mark and GBP/USD to 1.45 by the year’s end.
“Investors will be using the plummeting pound to their long term financial advantage.”
Comments from Viktor Nossek, director of research: “The people of Britain have voted to leave the EU. What does this mean for the economy and asset markets in the very short to near term?
“Our central thesis, as highlighted in our previous pieces, is that the UK’s structural economic imbalance will likely grow larger as a result of the Brexit. Underpinned by a large current account deficit of 7% of GDP, the UK is going to rely even more on the grace of foreign investors to finance a growing trade deficit, unless the pound devalues. This is likely to occur as, with the UK losing access to the EU single market, its trade in services – of which the UK is a net exporter to the EU – is likely to see barriers to EU trade being erected, even while its trade in goods – of which the UK is a net importer – will, for the sake of preserving the export earnings advantage enjoyed by EU members with the UK, remain largely untouched.
“Portfolio investment flows into UK fixed income and equities in 2015 accumulated to GBP 270 billion, or 14% of the GDP, levels that are extreme compared to years of relative stability during the period post-dotcom bubble and pre-2008 financial crisis. It is unlikely that foreign investors will be as enthusiastic to allocate into gilts and FTSE All-Share companies to that degree, not least because by invoking Article 50 – the only legal way to leave the EU – terms and timetables for new trade agreements are set over a 2-year period by the EU and from which the UK will be excluded. Combined with no reference for an alternative trade model to fall back to, it means undeniable uncertainty for a considerable amount of time and, until the dust settles, would compel asset allocators – at least in the short term – to consider reducing their UK exposure or refrain from asset allocating into the UK altogether.
“The pressure point in financial markets will gravitate around the sterling which, while trading more or less range bound since the start, has succumbed to significant intra-day volatility.
“From an asset allocation perspective, our stance to various asset classes over the short to mid-term are as followed:
UK financial services are most at risk of seeing trade barriers being erected, this in an attempt by the EU to reduce its trade deficit with the UK. Outside services industries, in sectors where the UK has struggled to gain preferential trade agreements such as cars, chemicals, clothing and footwear, and food, beverage and tobacco, a high tariff regime stands to remain, if not is at risk of being subjected to tariff increases. This, as the EU’s Qualified Voting Majority arrangement needed to get a new trade agreement ratified, will see the voting power of the France-led protectionist-biased block of EU members strengthened as the UK’s fallout from EU negotiations reduces the voting power of the more liberal, free-trade leaning block of BENELUX, Nordics and Germany.
- Hedging UK Mid and Small-Caps – Most prone to such downside risks are smaller-capitalisation stocks whose business models are more focused in the UK or whose trade profile is more concentrated in Europe. Hedging UK mid and small-cap stocks may be warranted, not least given that over 50% of UK trade is with the EU.
- Hedging major Eurozone broad equity markets and sectors. A dent to confidence will be afflicted to Eurozone’s broad, country and major sector benchmarks. Investors holding bullish positions in broader Eurozone, specific Eurozone sectors, or in German or Italian equities, may want to consider hedging such exposures efficiently, for instance through using leveraged short ETPs.
- Defensive positioning in UK Large-Cap, High Dividend Yielders – Least prone to unfavourable trade agreements may be UK large-caps. UK’s multinationals with a strong global footprint and lucrative dividend income offer defensive alternatives to the Brexit event which, on net, may benefit from improved exports if the pound weakens. Dividend payers within smaller capitalisation stocks may also provide some quality screen to stocks best able to weather the negative impact on EU trade longer term.
- Eurozone exporters, hedged – as UK’s exit from the EU could instigate further political instability to potentially lead to euro weakening – which so far has remained relatively immune from Brexit fears – a currency hedged exposure to Eurozone export-tilted large-caps may offer appeal to foreign investors. Ahead of general elections in France (May 2017) and Germany (Sep 2017) where fringe parties’ euro scepticism could fuel souring sentiment on the euro, the currency-hedged overlay may have longer term strategic significance.
- Dividend paying exporters, similar to our stance in UK equities, may offer the most defensive equity positioning in Europe.
Fixed Income and Currencies:
- Gilts: short-term gain, long-term pain. A risk-off sentiment will potentially boost gilts short term, with a strong incentive by the BoE to delay monetary tightening to soften the blow to business confidence and potential weakening economic ramifications. The already record low interest rates in longer dated UK government debt could falling deeper into the ground in the immediate aftermath of the vote. Further out, UK’s large macro imbalance will be laid bare as in anticipation of a volatile and debased currency, sterling’s safe haven status is undermined. With it will be foreign investors’ gilt purchases.
- Bunds: unassailable haven for safety. An already heavily crowded trade in German bunds may intensify if sentiment in risk assets, particularly within Eurozone banks, sours decisively. A negative yielding Bund may not be a big enough deterrent any longer as almost a quarter of outstanding Eurozone government debt is in sub-zero yield territory anyways. For as long as the ECB’s QE program lasts, Bunds are unlikely to succumb to major downside risks.
- Euro-dollar: Bearish euro, bullish dollar. The dollar is expected to benefit from bullish sentiment as relative to the euro, US domestic fundamentals are stronger. Banks have stronger balance sheets, the labour market remains resilient and business confidence is proving stable. A relative wide US interest rate differential over the Eurozone means the euro is structurally weak.
Association of Short Term Lenders
Benson Hersch CEO said: “I believe that much of the result represents a protest vote against the establishment, including both major political parties. Clearly, many people feel disenfranchised and left out.
“Economically, whatever the truth of the pre-vote alarmism, there will be a prolonged period of uncertainty ahead. This is not what markets want. I foresee sporadic fluctuations in currency and share pricing. Brexit may well help the upper-level property market, especially as foreigners seize the chance to buy at more advantageous exchange rates. On the other hand, economic uncertainty could inhibit price rises in the mainstream market.”
Tom McPhail, Head of Retirement Policy, asks what does the Leave decision mean for pensions:
“Against the weight of expectations we have a Leave vote, what does this mean for our pensions?
- Money Purchas pension investors
- Pension tax relief
- State Pensions
- Final salary pensions
Money Purchase pension investments
“For long term pension investors who may be seeing the value of their retirement savings falling today, the key message is to do nothing unless you have to. We are likely to experience a period of volatility in the markets and uncertainty in the wider economy, in these conditions, acting in haste is unlikely to serve well. If you are years from retirement and making regular savings, then just keep going; falls in the market mean buying investments at a lower price.
“If you are close to retirement, then try to avoid selling funds and shares right now. Annuity rates may move in response to changing interest rates, however this is not certain. International and domestic demand for Gilts and Sterling denominated investment grade bonds will influence annuity rates, as will expectations of inflation and to a lesser degree, short term interest rate movements.
“If you are in retirement and drawing an income from your investments then a good default strategy is to draw the natural yield (dividends from equities, interest on fixed interest stocks) as this means you aren’t cashing in the capital value of your investments at a time when they are falling in value. This means you are likely to generate an income of around 3% to 4% on your portfolio.”
Pension tax relief
“Pension tax relief costs the exchequer billions every year and there may now be increased pressure to balance the Budget; the government top up to our retirement savings could be an early casualty. The current Chancellor George Osborne had threatened an emergency Budget in the event of a Leave vote. Whether this happens or not, the possibility of further curbs to pension tax relief has now increased, so investors would be well-advised to make the most of the available tax relief while they still can.”
“During the Referendum campaign the Prime Minister warned that a Leave vote could mean the end of the Triple Lock on state pensions (annual increases of the greater of CPI, Earnings growth and 2.5%). This assertion was made on the basis that the economy would take a down-turn and that public spending might not be able to sustain the expense of this policy.
“The State Pension is expensive, costing around £90 billion a year; it is a very big slice of the DWP budget so any changes to the state pension could involve substantial savings. According to analysis conducted in 2011, the cumulative cost of the Triple Lock, relative to the old RPI link, between 2011 and 2026 would be £45 billion. If the Chancellor does now carry out his threat of a scorched earth Budget, then the Triple Lock could be an early casualty.
“We could also see a more rapid increase in state pension ages; John Cridland is already starting work on his review on behalf of the DWP.
Final Salary pensions
“The key question for final salary scheme members, sponsors and trustees is once the music stops, how will their assets and liabilities have moved?
“UK schemes are currently invested around 33% in shares (of which around a quarter are UK shares), 48% in Gilts and Fixed Interest, with the balance held in ‘other investments’ such as cash, property and hedge funds. On the liability side of the equation, any increase in bond yields would be a good thing (though it would be offset to some extent by falling values on the asset side of the balance sheet). A 0.1% rise in Gilt yields would reduce deficits by £23.3 billion (as at March 2015, source PPF).
If the economy does now start to stall or even contract, as predicted by the doom-mongers on the Remain side of the campaign then corporate profits will be hit and this in turn could lead to further funding issues for employers. The only good news is that a falling exchange rate may help these businesses to export their way back to profitability.”
Jim Leaviss, Head of Retail Fixed Income: “The UK has voted to “Leave” the EU. We’re seeing some significant moves in fixed income assets first thing this morning as financial markets had very much discounted a “Remain” outcome, in line with the last opinion polls and in particular the betting markets which had heavily backed that outcome. The biggest market movements though have occurred in the FX markets where the pound fell from nearly 1.50 to 1.36 versus the dollar, lows not seen since 1985. The US dollar index has rallied by nearly 3%, and the big winner in this “risk off” scenario has been the Japanese yen, itself now up 3.6% against the US dollar. The Euro is performing badly as both the economic and political implications of the “Out” vote are digested – will European growth be hit, will other EU nations hold their own referendums, what will become of the periphery and the banking sector? The Euro is down by over 3% against the dollar. In a risk off morning, the other big losing currencies are those in emerging markets. The Mexican peso for example is 6% weaker.
“Within bond markets themselves, the US 10 year Treasury has rallied by 25 bps (more than two points) overnight, and the 10 year bund has moved sharply back below zero – now trading at a new record low of -15 bps. This follows Thursday’s sell-off in government bonds in anticipation of “Remain”. Gilt markets will also rally when they open at 8am, and all eyes are on the Bank of England which has committed to keep the banking sector awash with liquidity. I wouldn’t rule out a rate cut from the BoE later this morning, perhaps to 0% from 0.5% (although this would likely trigger a further sell off in sterling). A likely ratings downgrade for the UK has been flagged in advance in the event of a “leave” vote – markets have generally not punished downgrades on highly rated sovereigns (for example the US when it lost its AAA rating). There is no significant default risk for a nation which can print its own currency.
“The “losers” in bond markets are the riskier fixed income assets. As further EU breakup fears grow, Italian and other peripheral government bonds are underperforming. Italian and Spanish 10 year bond yields have risen by 30 bps so far this morning. Peripheral financial bonds are perhaps 60 bps wider in spreads at the senior level and up to 130 bps wider at the subordinated level. Banks in general, even in “core” nations, are also performing poorly relative to traditional corporate bonds. Senior bank debt is 50 bps wider, and subs are 100 bps wider. Corporate bonds are anything from 20 bps to 80 bps wider. There has been talk of institutional buying at these lower levels, although we are sceptical that there has been much trading so far today. Emerging market bonds are all much lower. Turkey’s US$ debt is off 2 points, South Africa 3 points and Hungary 6 points. The high yield market was extremely weak initially, with the Crossover index at one point 120 bps wider. It’s retraced some losses and is “just” 80 bps wider now.
“Fundamentally the sell-off in risk assets presents some opportunities for long term investors. Credit markets were already discounting a much higher level of defaults than we believed likely, and today’s moves increase the over-compensation for default risk. However, with liquidity likely to be low today (and potentially for some days to come as the implications of yesterday’s vote become clearer) the chance to pick up bargains might be limited.
“What about the economy? Well 90% of economists expected a “leave” vote to be negative for UK growth. Some say that even the uncertainty leading up to the vote took up to 50 bps off GDP growth. Certainly investment intentions are likely to be delayed by businesses, and households may become more cautious. A recession can’t be discounted. With the global growth outlook also now likely weaker we expect the US Federal Reserve to be on hold. No rate hikes for the foreseeable future. UK inflation is a different matter. A fall of this magnitude in the pound will lead to higher import prices. After years of inflation being below target, it should move higher than 2%. However in the interests of growth and financial stability this is unlikely to provoke a response from the Bank of England: as mentioned earlier a rate cut is more likely in the first instance.”
Andrew Schlossberg, Chief Executive Officer of Invesco Perpetual and Head of Invesco’s EMEA region: “Whilst there will be a lengthy period of negotiation and the terms of separation and future operating environment will remain unclear for some time, from an operational perspective there is no immediate impact on Invesco Perpetual’s products and services. We have communicated with clients to reassure them of this and will keep them updated regarding any relevant developments.
“Our senior management team has been preparing for the results of this referendum vote for some considerable time and we have strong measures in place to ensure that any immediate market volatility created by the vote and any changes brought about by this transition are well managed. As always, we remain focused on our clients’ best interest at all times.”
“As part of Invesco, a leading independent global investment manager with a world-class investment culture, Invesco Perpetual is extremely well placed to help our clients and manage our business through any changes that follow today’s EU referendum result.”
Mark Pugh, UK asset management leader: “A key immediate concern for asset managers will be the management of market volatility – the natural companion of political and economic uncertainty. For asset managers, the concern is particularly pressing as it impacts the value of the very product itself. Some listed UK asset managers will be worried about the combined impact of volatility on their own share price alongside the impact on the value of the assets in their funds.
“Hand in hand with this will be liquidity concerns for funds, especially if there is a run of outflows over a long period of time with no market correction. Regulators have been focused on liquidity risk for some time and the asset management industry should already have stress tested for this outcome but those who prove unequal to the task can expect scrutiny.
“Communication with clients is crucial as many customers will not know how to respond. Many asset managers have set up dedicated helplines and call centres to provide information to assist investors make informed decisions.”
Ian Powell, Chairman and Senior Partner of PwC: “The UK’s decision to leave the EU will have significant implications for businesses and we are already working with our clients and people to support them as those implications are understood.
“History has taught us that UK business is adaptable and innovative when confronted with new challenges and opportunities. There will be significant uncertainty over the coming months as the detailed political and legal issues are worked out, and business confidence may be impacted. PwC is committed to helping its clients as they adapt to new market conditions and opportunities.”
M&G Episode Defensive Fund
Eric Lonergan, manager of the multi-asset fund: “The biggest reaction has been in sterling, which has fallen 10% overnight against the dollar. There has been a predictable flight to safe haven currencies including the yen and swiss franc.
“We won’t know until US markets open but the early indications from the overnight US Treasury bond market and Asian markets is that this is primarily a UK and European issue: yield on US 10Y treasuries has fallen 25bp which is similar to movements seen in February – a fall but not over dramatic.
“European and UK markets are not yet open but we expect European equities to fall approximately 5-10%, German government bonds to rally and peripheral European bond spreads to widen. The Financials sector is likely to be hardest hit.
“More fundamentally, it is too early to tell the impact on the UK and European economies because everything depends on the terms of the relationship the UK and Europe negotiate. It will be a long time before we know what leaving the EU means – the possibility of a general election can’t be ruled out, or even an EU constitutional summit to offer the UK alternative terms.
“What is more important than where we are at the end of today is where we are in a month or a year’s time.”
Premier Asset Management
Chris White, Head of UK Equities: “The referendum result is likely to leave markets under a cloud. Sterling is already under pressure and equity and gilt markets are likely to remain volatile. Essentially we do not know what our terms of trade are going to be with our major trading partner, which represents about 50% of our exports. Part of the UK’s success over the past 40 years has been in terms of attracting foreign investment to our shores. Foreign investors have come here for many reasons, but one of the major reasons is that we are, and are seen to be, a gateway to Europe. For example, it is foreign investment that has built up our banking, financial services and automotive industries and it remains to be seen how these businesses react over the medium to longer term. It is likely that defensive stocks and multinationals will come to the fore, whilst financials and both consumer and industrial cyclicals will come under pressure.”
State Street Global
Rick Lacaille, Global Chief Investment Officer, State Street Global Advisors:
“While the vote to leave has immediate market implications, over the longer-term observers will be wary of the impact the vote has on other nationalist and protectionist movements – both in Europe and elsewhere. In Europe, nationalist parties will feature prominently in elections next year in Germany and France.
“There is the potential for knock on consequences for market-moving issues like trade, labour mobility and foreign investment. How the EU strikes a balance between facilitating a swift UK exit to reduce risk as quickly as possible, and discouraging similar movements in other countries, will be important.
“In the weeks leading up to the vote a range of international financial and trade bodies including the IMF, World Bank, Bank of England, and WTO laid out concerns of a UK exit from the EU. These included risks to global growth, trade, foreign investment and financial market stability. The exit vote realises the potential for these projections to unfold.”
Michael Metcalfe, Head of Global Macro Strategy, State Street Global Markets:
“In the three months before the referendum it was noticeable that international investors increased their holdings of UK equities and gilts in spite of the uncertainties created by the vote. The only place where investor behaviour changed was in the currency market where investors hedged their currency risk. While this hedging has proven prescient given sterling’s depreciation following the vote, the key question now is whether international investors will now seek to reduce their underlying holdings of UK assets. If the uncertainty following the Leave vote persists and because investors bought rather than sold UK assets before the vote, there is a heightened risk of outflows from both UK equities and Gilts.
“We will also be watchful of contagion into European assets, especially the Euro. Even though the ECB is expanding its balance sheet aggressively, it is noticeable that investors have reduced their bets on a continued depreciation of the Euro. If the Leave vote refocuses market attention on the potential political divisions within Europe, there currently appears to be little political risk premium priced into the single currency and with monetary policy encouraging Euro weakness as well, we would anticipate the downtrend in the EUR against the US dollar to resume.”
Commenting on the referendum result, Richard Stone, Chief Executive of The Share Centre, said: “At a personal level a majority of investors may welcome the result as it meets with the wishes a majority indicated to us in our recent customer surveys. However, it is likely in the short term to result in increased market volatility amid uncertainty over what a vote to leave will mean for the UK.
“That negative short-term outlook may soon be reversed for those companies which will benefit from their exports being more competitive or their overseas earnings being more valuable in Sterling terms. Investors will need to be sure-footed in identifying those companies which may benefit from the outcome of the vote and look for opportunities where whole sectors have been written down without any meaningful differentiation between companies to reflect the variation in impact the vote will have. The market will return to valuations based on fundamentals in due course.
“It is vitally important for markets and for personal investors that any changes in Government take place swiftly and that those charged with negotiating our exit from the EU set out as clearly as possible how they plan to steer the course for the UK going forward. We would urge the Government not to undertake any knee-jerk reactions in terms of an emergency budget, and should such a budget be deemed necessary tax incentives which encourage investment should not be a target for savings. To do so would be short sighted as the UK economy now more than ever before will be reliant on the small businesses, many backed by personal investors, to drive economic growth and future employment.”
Paras Anand, Head of European Equities: “The vote by the UK electorate to leave the EU has certainly taken both the currency markets and stock markets by surprise. It is important to recognise the scale of moves that we are seeing are in context to a strong performance both by Sterling and by UK markets over the last week. Whilst the result will lead to political uncertainty which may lead to shorter term volatility in the markets, it is important to remember that such events impact the long term prospects of companies only at the margin. The consequence of the vote on the UK domestic economy and Europe more broadly is difficult to call and will likely only be evident over time but the fall in the currency increases the competitiveness of those sectors exporting both goods and services internationally and should increase the appetite for inward investment over time. If we look at the corporate sector in particular, we are in an environment where companies are holding significant cash balances and the scope for ongoing corporate activity remains. This should limit the extent of the falls that we should see over the coming weeks and months.
“What we are doing today is no different to last week which is using the opportunities that arise from these short term macro-economic events to focus on companies that we want to own for the longer term. The Pan-European corporate sector is truly international in nature. If you look at the US corporate sector, it very much faces off the domestic economy; the Asian corporate sector likewise earned 60% of its revenues and profits from the Asian region. Compare that to the Pan European corporate sector which is much more broadly based. So even in a scenario which the vote to leave has a negative impact on demand in the UK and Europe to a greater extent than we currently believe, it will not at the aggregate level dominate the prospects for companies as much as some might believe.”
Stephen Bailey, fund manager, Macro-Thematic team: “We have considerable US dollar exposure in our portfolios and while this is not a Brexit-driven position, we believe it should provide protection in the event of a drop in sterling. We believe the vote to leave could cause Cable (the sterling/US dollar exchange rate) to correct by around 10% and would act to hedge our position if we see a 1.30-1.35 level. In terms of equity markets, we believe the UK could come off by around 5% but stress that we see any market and currency implications of Brexit as short term and do not expect any long-term damage. London remains the most important financial centre in Europe and its size and skilled labour pool, together with English being the global business language, should ensure it stays in this position. That said, given the damage to the Conservative party in recent weeks, we believe a leadership challenge and perhaps a General Election are possible, which will bring a fresh bout of uncertainty.”
Patrick Cadell, fund manager, Global Equities team: “Ahead of the UK Referendum, we took measures to reduce risk in the GF Global Strategic Equity Fund by lowering net and gross exposure. Following today’s vote to leave, we expect to maintain a low net exposure for the time being and add to single stock short positions. The UK’s decision to exit the EU is likely to lead to a period of extended political uncertainty as separatist movements in other EU countries gain momentum and the future of the single market comes in to question. In addition, global risk appetite is likely to deteriorate, putting significant pressure on liquidity-dependent assets such as emerging market equities. We would expect this environment to offer a number of good investment opportunities on the short side of the portfolio in the near term. However, given that actual trade linkages to the UK are low within emerging markets (less than 1% of GDP) and today’s decision is likely to be met by an easing of monetary conditions globally, the medium term implications for EM equities are not as negative. As a result, we would expect an excellent long-term entry point to emerge within the next year and for EM equities to be one of the best ways to play an eventual recovery in markets.”
Anthony Cross, fund manager, Economic Advantage team: “Now the Leave vote is in, we expect a period of uncertainty that will impact domestic consumer confidence and business investment within the UK. The likely fall in sterling will be a two-edged sword. It is a negative for companies that need to import goods or services but beneficial for those who export. Uncertainty in the run up to the referendum triggered notable falls in UK consumer sectors such as retailers and housebuilders. Looking at our portfolios, we have little exposure to these consumer businesses, nor do we own retail banks. We do however own UK-focused service and software companies that are reliant upon continued business and government investment. It is worth stressing that many of these companies have high contracted recurring income, which gives them a degree of insulation. We have a good number of exporting businesses in service areas and engineering that should benefit from sterling weakness. Overall, we expect a short-term sell off in equities with a greater impact felt among the mid 250 stocks and smaller companies.”
John Husselbee, Head of Multi-Asset: “There is little precedent for what we might see in the months and years ahead now the UK has voted to leave the EU and the possibility of substantial asset price volatility should not be discounted. To protect our portfolios, we sold down some equity exposure and upped our cash positions in May. That said, we feel any overreaction to Brexit risks getting caught up in Benjamin Graham’s short-term ‘voting machine’ when we should be looking at the long-run. Our portfolios are stress tested and constructed to seek maximum returns for a given range of target risk. Graham’s weighing machine favours equities being held over the long term and the biggest risk to any investor is abandoning a long-term strategy based on short-term anxiety. If any assets are hit particularly hard in the coming weeks, we would look to exploit this short-term anxiety as a cheap entry point for securities with good long-term prospects. What is clear is that this vote will not only have an impact on financial markets but also potential political implications – including calls from other EU nations to hold their own referenda. Whether this is offered by those currently in power or opposition seeking a vote winning strategy, it could further endanger the European Union and increase speculation over a break up.”
With the UK leaning towards a Leave vote in the UK referendum, Adrian Ash, Head of Research at BullionVault.com, comments on the surge in the gold price – the fastest move against the pound in history:
“The surging gold price clearly shows the panic sweeping financial markets. Gold jumped 22% against the Pound overnight, its fastest ever move, leaping to new 3-year highs above £1000 per ounce.
“Over the last 7 days, BullionVault has been used to trade £18.2m of physical gold and silver. That’s 76% greater than the last year’s weekly average. Customers have now traded a further £6.5m overnight in some 1,500 deals between midnight and 5am.
“This is just the kind of crisis which gold helps savers and investors insure against. Gold offers certainty and security as stock markets and currencies sink, just as it did during the 2008 meltdown. The difference is that this shock was clearly signposted, and many private investors didn’t wait for today’s result to get prepared.
“By last weekend, the number of new UK customers starting to use BullionVault in June was 75% ahead of the last 12 months’ daily average. That rate of growth has now risen to 84%.
“There’s also been a notable upturn this week in new customers from outside the UK. Across our 9 next largest markets (led by the US, France and Germany) June’s growth rate in new users has risen from 23% to 34% above the last 12 months’ daily average.”