What does the outcome of Brexit mean for your investments?
Well, the people have spoken and 52% of them have said.....out!! While many of us, here in Scotland, may be scratching our heads about it – we remain part of the United Kingdom and will be impacted by these actions in terms of economic environment, investment market and regulation of financial services.
So, what happens next?
Investors are now in uncharted territory. In the months leading up to the Referendum vote, many investment managers had taken tactical decisions to reduce some of their equity weightings, move to less volatile holdings and to a degree, increase cash. But investment funds by their very nature – have to remain invested in market to some degree – so sitting it out in cash altogether was just not an option. It’s fair to say that the result has caught investment mangers ‘on the hop’. The opinion polls leading up to the vote were neck-and-neck, but financial markets and book makers had lately swung to expecting a high probability of a Remain outcome. Indeed, betting markets priced in a 90% probability of Remain the day before the vote and on Wednesday and Thursday of this week, there was a rally in stock markets and in the value of the pound. We do not yet know why, but they were wrong, and the surprise is a major shock to financial markets.
The old mantra of sit tight was never more appropriate that it is now. With the Scottish Parliament elections, an EU referendum and election of the US President; 2016 was always going to be a challenging year for investment. In this new environment, there is very likely to be series of short, sharp, shocks to the stock market followed by quick rallies - so timing any sale of assets is going to be very difficult. A 52% mandate to leave has been concentrated in England (ex. London) and Wales, whereas the Remain votes have largely come from Scotland and Northern Ireland. This creates urgent questions about the future of the ‘United’ Kingdom as a single entity.
The key at such times of heightened uncertainty is to maintain a sensible longer-term view and not try to achieve the impossible task of second guessing short-term market trends. It may seem uncomfortable in the short-term but selling into markets during times of panic is not a sensible investment strategy.
If you are invested in the markets, then you should be taking a medium to longer term view. The investment managers that we recommend tend not to be involved in short term ‘day trading’, but select stocks on the basis on 3 – 5 year time horizons. The extent of the falls could prove irrational, and create some compelling opportunities for longer-term investors
Brexit is likely to have more of an effect on domestically focused businesses that are more prevalent amongst medium and smaller share indices. This is unfortunately, not good news for ethical funds – which tend to have a higher allocation to this size of company. A short-term downturn in the UK economy as a result of Brexit is inevitable. Businesses are likely to put off decisions given lack of visibility and uncertainty will also hit the consumer. Some sectors of the market will suffer more from the decision to leave than others. For example, house-builders are falling heavily given risk of a fall in property prices over the coming months. The banking sector is also seeing a significant sell-off.
The Governor of the Bank of England has acted quickly. He has made a speech, indicating the implementation of stimulative measures, which has helped to allay fears and stem panic selling. This has been positive in ensuring there is not a repeat of the near meltdown that happened during the banking crisis. Likewise, the decision of David Cameron to stay on in post until October and to defer activating Article 50 of the Lisbon Treaty, with its two year negation period, does at least, help to set up and clear timetable for exit.
Is Brexit and Britain that important?
Whilst much reference has been made to ‘taking back control’ and many ‘outers’ have implied that it will herald a return back to a ‘golden era’ of Great British influence; we have to accept that the days of empire are long over. Although we are still the 5th largest economy in the world, our position is waning in the face of globalisation. Brexit is more important in terms of what its wider impacts on Europe are, but it is just one of a number of issues that will drive global markets.
Equally important is looking at the bigger picture facing global markets. Factors such as commodity prices, US interest rate policy, the growth of the Chinese economy, global debt levels and inflationary versus deflationary forces remain equally important.
Financial Services markets
The exit from the European Union is bound to have impacts upon the U.K.’s financial services markets. Whilst people may not shed a tear for ‘bankers’, there is a reality that a significant proportion of the UK economy (and indeed Scotland’s) is represented by the financial services companies. Not only were these UK-based businesses but also (by use of EU passporting) they were bases for both trading in and working with European markets. We may now see the gradual shift of power from London to Frankfurt, combined with loss of UK jobs and associated service industries.
The delivery financial advice and many of the investment products that we have used have also been harmonised with the EU over the last 15 to 20 years. EU legislation has been integral to much of the regulatory background to delivery financial advice from anti-money-laundering, through product structure and pricing to consumer protection. For example, the Financial Services Compensation Scheme is actually modelled upon the European rules and the £75,000 protection is set because it is the equivalent of the EU €100,000 limit.
There are currently a number of initiatives in development within the financial services regulation sector relating to money-laundering and application of tax relief on specific investments. We therefore await further guidance as to how and if the market is to undergo a further upheaval in terms of registry structure.
The future is unwritten
Only time will tell exactly what the ramifications of yesterday’s historic decision will be. The lack of certainty and potential for change in both regulatory and taxation environments, mean that financial planning will become more challenging. However, as previously mentioned, we live in a globalised world in which investments in capital markets remains the main way of stimulating and driving economic activity. The fundamentals of the markets will not necessarily change, but we will be in for a volatile year or two until greater clarity is achieved about the future. Arguably, there has never been a more important time to seek considered financial planning advice. Ethical Futures will be pleased to answer any specific questions you may have about your own investments and will keep you posted on relevant future developments.