Post EU Referendum Observations

This morning’s news of a victory to the ‘Leave’ campaign has come as a shock to many. Perhaps more so to City traders and betting agencies than to others as both financial markets and high street bookmakers alike were pricing in a high likelihood of the ‘Remain’ camp being successful in yesterday’s referendum.

Markets have reacted in a manner that was to be expected following today’s news.  Sterling has weakened versus a broad basket of foreign currencies and global stock indices are exhibiting heightened degrees of volatility. Perceived safe haven assets such as gold and government bonds are rallying in light of the referendum outcome.  Of course, due mention should be made of the Prime Minister’s resignation this morning which was not wholly unexpected given the decisive Leave vote, though perhaps not with such immediate effect.

On the surface – and focusing specifically on the financial implications – this news may be received by many as being unreservedly negative; however, we offer below some broad and impartial observations on the situation:

  • Financial markets are driven by their participants and there is myriad academic and empirical evidence to illustrate that these participants tend to overreact to negative news and/or unforeseen events; indeed, this same evidence highlights the fact that, once cooler heads prevail and greater clarity has been achieved, markets then tend to drift back to levels based more upon fundamentals than emotion (* Note)
  • Volatility in UK markets may well remain heightened in the coming months, though one must remember that even if the government decides to trigger Article 50 immediately, there still remains a 2 year window for negotiation where sound and hopefully mutually-beneficial agreements can be made between the UK and our major trading partners in the EU
  • Sterling’s weakness will provide a useful – and potentially significant – boost to UK exporters as UK goods and services will become more attractive to foreign buyers on a relative basis
  • The Bank of England has had contingency measures in place for some time now and, in Governor Carney’s own words, ‘The Bank will not hesitate to take additional measures as required as markets adjust and the UK economy moves forward.’  When drawing parallels to the Global Financial Crisis (GFC) of 2008, remember also that UK banks are far better capitalised now than was the case then and this should enable them to continue the supply of lending to the UK economy – a critical function that was all but lost during the GFC

Our clients will be familiar with charts such as that below which shows the total return (dividends plus capital growth) of the MSCI All Countries World Index over the past 28 years.  Despite various financial and political crises, bubbles and credit shocks, the constantly invested individual would have earned a return of 864% in GBP terms were he or she able to cope with bouts of short term volatility.

At Aspinalls we have always advocated the benefits of investing over the long term as part of a long term financial plan; furthermore, those who have remained invested over years and decades past will be well versed by now in two key and well documented phenomena:

  1. Volatility is an inherent aspect of investing, especially in asset classes such as equities where future returns are uncertain
  2. The longer one can remain invested, the greater the probability of achieving a positive return net of inflation

If you would like to discuss this, or any other aspect of your portfolio please do contact our office.

* Note:  At the time of writing (3.00pm), it is worth highlighting that both the FTSE 100 and FTSE All-Share Indices are at higher levels than their closing positions a week ago on Friday 17th June.


Michael Ast, Chartered FCSI
Head of Investment