Tuesday, June 28, 2016

EU Referendum

Whichever way you voted, 23 June 2016 will be remembered as a momentous day in the history of not only the UK, but also Europe and beyond. After months of uncertainty and market volatility, the people of the UK voted to leave the European Union (EU) by 51.9% to 48.1%, after 43 years of membership.

The decision inevitably brought some uncertainty and confusion to the markets, sterling and the political landscape. Events will continue to unfold at a rapid rate. What is unclear is how long that uncertainty and confusion will continue.

Immediate reaction

The UK’s vote to exit the EU sent shockwaves through financial markets. After a week of positivity in the markets, the outcome came as a surprise to the City, which clearly expected a Remain vote.David Cameron, who campaigned ardently for the UK to remain in the EU, announced that he will stand down as Prime Minister by October, following the election of a new Conservative party leader. The Prime Minister has said that Article 50, the formal request from the UK to leave the EU, will be activated when his successor is in situ, triggering two years of formal exit talks. However President of the European Parliament, Martin Schulz suggested that the UK should begin negotiations imminently. What is clear is that voter turnout was high – 72.2%. What’s also apparent is the huge regional and generational divide. Voters in Scotland resoundingly chose to remain in the EU, so the breakup of the UK is a distinct possibility with Scotland expected to hold another independence referendum. Whoever the new Prime Minister is, they face an immense challenge to reunite the country. The focus for investors is now on the short and long-term macro implications.

Sterling and the markets

The morning after the vote the FTSE 100 index tumbled 8.7%, paring back some of the losses later, following reassurance from the Bank of England with Mark Carney pledging to do whatever it takes to protect Britain from financial crisis. It closed just 3.15% lower at 6138.69. Equities across the globe also fell sharply,while perceived safe haven assets – including gold – rallied. Sterling fell against its major trading currencies to
touch a 31-year low, but recovered from the initial shock, the pound bouncing back 4 cents against the dollar to $1.3642. International ratings agency Moody’s downgraded Britain’s creditworthiness to negative from stable.

European implications

Brexit brings serious implications for the EU itself. Brussels has demanded that the UK start talks to leave the EU immediately, but the ‘Leave’ camp are resisting Brussels’ call to go quickly. With
the EU increasingly concerned about the potential spread of contagion to mainland Europe, meetings and discussions will be ongoing over the coming weeks and months.

Intervention of policy makers

The Bank of England’s statement offering liquidity and determination to ensure financial stability, helped soothe the markets. The reaction of central banks and policy makers will be instrumental in limiting the downside and calming fears over the economy.

The bottom line

With the result undoubtedly a surprise for the markets, we find ourselves in uncharted territory. What ‘leave’ really looks like is still unknown. The UK faces an extended period of uncertainty and market volatility, during which time it is important to maintain investment focus. We remain composed and professional and will continue our considered,measured approach to carefully navigate these challenging investment conditions. Volatility is an inevitable part of investing. Movements can be extreme and it is natural to feel concerned about the investment climate. It is essential to consider longer-term timescales instead of focussing too closely on short-term
volatility. However concerning market fluctuations may be, it’s important to remember that we have jointly worked
hard to formulate a financial plan which is in-line with your own personal requirements and will continue to do so.