Now that the United Kingdom has chosen to head for the EU exit door, the ramifications for investors, savers and borrowers have been quick to be felt. Falling interest rates, Sterling weakness and market volatility are already with us and once ‘Article 50’ is invoked things will really start to happen.
The initial market reaction was a significant fall in both sterling and UK equities as fear and uncertainty reigned for investors. However, this was shortly followed by a significant recovery in equity markets which has resulted in strong performance for many assets over the period.
Overseas assets have been boosted in Sterling terms by the currency devaluation, whilst UK equities recovered on hopes that the Bank of England will provide further stimulus as a consequence of the Brexit vote. During the reporting period the FTSE 100 increased in value by 6.54% and the FTSE World Index by 8.71%. Fixed interest investments were also boosted in value as the expectation of future interest rate rises lessened dramatically, leading the FTSE Gilts All Stocks Index to increase in value by 6.18%.
In the meantime, Standard & Poor’s and other ratings agencies have reduced their view of the creditworthiness of the UK, warning of further downgrades due to lower economic growth expectations. Despite this the effect to date for investors has been generally positive and some investors will be surprised that their portfolios have risen sharply as a result of Brexit.
In fact, there may be more positives than investors perceive right now. The almost overnight devaluation in our currency is something which other Western economies have being trying to achieve for many years, as the benefit of a weak currency is that exports become cheaper and imports more expensive, boosting demand for domestic goods and services. The Brexit effect has created a 10% price cut for UK exporters.
From an investment perspective, the referendum result was a shock to global markets and initial thoughts were of a disorderly and rushed exit from the EU. As the initial shock subsided, it became clear that this exit will be over a number of phases and on a glacial time scale rather than a ‘quickie’ divorce. The uncertainty will continue and lead to market volatility.
Prior to Brexit we believed that economic progress was likely to exceed expectation with signs that the second half of 2016 could experience accelerating growth. This indication is no longer valid as the effects of the referendum are unknown as we await further Post Brexit data to come through.
Initially, signs of falls in confidence have been observed with downgrades to UK, European and Global growth being reported by many agencies. This reflects apprehension, which is understandable, and if indicators improve in the short term this will be positive; however sustained falls will cause concern and could reverse the recent upward momentum in markets.
In the meantime, we continue to believe that investors should accept the volatility of equity markets for modest medium and long term returns, rather than leaning towards the near-zero return of cash and bonds. We further believe if you are not already doing so that you seek independent financial and tax planning advice to check and ensure that your financial arrangements are fit for purpose now and for your future. If they are not, then appropriate changes will require to be made to put you on track and move forward accordingly.