Quilter Cheviot – Referendum Commentary

UK and European economies now face a period of at least two years of uncertainty as the UK attempts to negotiate itself from the European Union while maintaining access to European markets.


Challenges in the near term will create a period of uncertainty as a new prime minister is put in place, the terms of exit are negotiated and the future of the EU and Scotland in the union is put under close scrutiny. Inward investment may be muted during this time and we will need to see how the decision impacts the economy in the short term and whether this will affect the longer term picture. The global economic backdrop also remains challenging and as financial markets loathe uncertainty we will be entering a difficult period of volatility which may at times be extreme and reactionary.


In the run up to vote I have been, in most cases, de-risking client’s portfolios by reducing UK equities and commercial property exposure whilst increasing Gilts and cash. We are not immune to short term heavy movements in stock markets but the portfolios are well diversified and are generating income from dividends and interest that should help reduce volatility. Falls in stock markets also create opportunities and this cash in the portfolios can be utilised if I feel there is a good long term opportunity to invest when the dust settles to take advantage of the volatility.


It is Sterling and certain sectors of the UK stock market such as UK Banks, Financials, Real Estate and Housebuilders that have taken the brunt of the sell off this morning with some names down over 20%. Other more defensive areas such as Pharmaceuticals and Tobacco are actually up as I write.


A weak pound can be a benefit though as many global companies receive their earnings from overseas so this will actually provide a boost to them and their dividend pay outs. A weak currency can also help exporters, make the UK attractive for tourists and make UK companies more attractive for takeover by overseas companies. It also increases the sterling value of the portfolio’s overseas holdings.


We have seen Mark Carney state this morning that he will support the banks and the financial system which will be echoed by other global central banks. The Fed will now probably further delay increasing interest rates in the US this year which had been a concern for stock markets this year as it will impact global growth especially in China and Emerging Markets.
So the short term is uncertain and volatile though long term we need to see how this plays out and react accordingly. We are still a member of the EU for 2 years and the UK economy at present is relatively robust. Trade will not stop, we carry on as we are until Article 50 is activated giving time to begin initial negotiations to get some indication of timescales. If we do fall into recession will this be a quick shallow recession or part of a heavy downturn?. All questions I cannot answer. The FTSE100 at the moment is over its level as at close last Friday as we had our Remain rally over the course of this week but we will see what happens when the US opens later and what the coming weeks and months bring.


I feel that the bigger picture worry is potential recessionary pressures in the US and this will would move markets far more dramatically if growth did weaken in the US whether partly from Brexit or the November Presidential elections.


Please find the link to the official Quilter Cheviot update