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EU Referendum Result – It’s Time to Leave

Written By: Mark Cooper on June 24, 2016 No Comment

Shocked OnlookerI must confess this is version two of this Blog post, having convinced myself late thursday afternoon that the “remain” camp had won I wrote a lengthy tome in the evening whilst awaiting the results into the early hours, at which point I would have slumped off to bed.

Of course it turned out very differently with an astonishing “leave” victory, the silent majority once again flexing their democratic muscles as they did in the 2015 General Election.

I do not gamble, well ok a few pounds on the Grand National to no real avail since Ben Nevis won at 40/1 in 1980, but I did keep an eye on Ladbroke’s Brexit odds yesterday. At noon remain was at 1/8 (£1 winnings for each £8 staked) and leave was at 10/1. By midnight the odds were 1/2 v 15/8 and of course they subsequently crossed over as results poured in reflecting an incredible surge for “leave”.

After two hours sleep I returned to the TV to watch financial markets open and PM David Cameron resign in a dignified and statesman like way. An astonishing twelve hours that will fill a future chapter of “A History of Great Britain 2,000-2,100 AD”.

But what does it mean for investments and the financial plans they underpin?

Investment Market Reactions

During the referendum night the TV analysis frequently crossed over to dealing rooms where screens showed dramatic falls for the Pound and plummeting Equity Futures (predicted opening market indices) around the world. Like most charts though they looked a lot more dramatic than the facts justified.

The £ v $US fell “to levels last seen in 1992”. Well no actually, the pound reached a similar point in March this year when an already strong dollar surged further, believing that US interest rates looked to be finally taking off, before a subsequent u-turn, and European currencies were already fretting about a possible Brexit.

When UK Equities opened at 8.00 AM this morning there was an immediate sell-off, notably Banks falling by up to 40% (RBS, Barclays, Lloyds), Housebuilders 45% (Taylor Wimpey, Barratt Homes) and even Supermarkets by 15% (Sainburys, Tesco). The FTSE100 Index fell 10% by 8.10 AM …… and then it turned around, clawing back three quarters of the day’s losses by 3.00 PM. In fact even by 12.30 PM the FTSE index was higher than it finished on Friday of last week.

Markets hate uncertainty and an unexpected outcome of this potential magnitude created a blind panic briefly, but then some rational thought took over. Why would a Brexit cause our two largest supermarket chains to instantly fall in value by 15%? Are we going to stop doing our weekly shop or stage a collective hunger strike? Will we stop building houses any time soon with such an undoubted shortage amidst huge demand? The Banks are entwined with European and Global Banks so there was some justification for caution but they soon bounced back as the doomsters came to their senses.

The real losses were taking place on the European bourses, reflecting the fact that the EU will suffer significant if not terminal damage from losing their second deepest set of pockets, whilst other member states will surely face similar rebellions from within? The UK has the fifth largest economy in the world and the forth largest importer of foreign goods and services. Talk of trade barriers and “being at the back of the queue” are absurd, to be frank.

What should I do right now?

“Nothing” is the brief but appropriate answer.

Markets have been, are and will remain volatile for a while, with an equally epic battle likely to dominate the USA later in the year, whilst a weakened EU must face up to looming problems with Greece (again), an increasingly unstable Italy, Spain and maybe more.

As long-term investors it is notoriously hard and usually foolhardy to predict the short-term direction of markets, time entry and exit, or trade on knee-jerk volatility, so we don’t.

Things have changed, but change presents fresh opportunities and great companies largely remain great companies, able to adapt if necessary, seize on the weakness of others and continue to thrive. For example if the £ does weaken against other currencies it will benefit exporters. Germany, with it’s huge industrial base has been dining out on a weak Euro for years.

Your investments, whether they sit in a Pension, ISA, General Investment Account or Bond are well diversified across many different asset classes, geographical locations and management styles, with income generated and reinvested through thick and thin.

At times like this the Cash balances within the funds, historically high just now, will be seeking quality assets at perceived bargain prices. For example if a manager likes Sainsbury’s as a company they may very well have topped up their share-holding this morning at a 15% discount to the ‘fair price’ just a day before – why spurn such an attractive opportunity?

What happens next?

A two year consultation process begins shortly between the EU and the British Government to establish just how an orderly Brexit is accomplished, with as little disruption as possible in the meantime. Then the great unwind begins, taking perhaps three or five more years to complete. You would think someone flicked a switch at 8.00 AM this morning given how some commentators have been going on today already.

Meantime trade deals will be negotiated around the world. Mr Cameron mentioned only this week that Britain conducts more trade with Luxembourg than with India right now. How can that possibly be seen as anything other a missed opportunity, amongst many more out there?

In summary, we stay invested unless there is an imminent need for a withdrawal not already identified, and allow the UK, Europe, US and the rest of the world to adapt to a new normal, with no doubt more hurdles and opportunities along the way.The sun still rises, companies trade and consumers still spend around the world. The wheels really will keep on turning.

I hope you found these initial thoughts and observations helpful and I will add to them as Fund Managers share their wisdom and news over the coming weeks and months.

In the meantime if you have any specific concerns, or further financial planning needs you wish to discuss, please do not hesitate to get in touch.