So the UK has voted to leave the EU. As we look forward, the implications of this decision are hard to predict. The political and economic landscape in the UK and further afield will alter dramatically over the coming days and weeks. The long process of negotiating an exit and subsequent international relations begins immediately but no one can be sure of the timetable or outcome. On Sunday, the Spanish general election may provide some indications of the broader anti-EU voice. No doubt today’s result will increase calls for referendums in other EU states, including Denmark, Sweden and the Netherlands. To a large extent, the UK’s experience in negotiating an exit over coming months will continue to shape the future of the EU for some time.
So what will be the impact for UK investors?
The biggest impact will be on sterling, UK equities, UK gilts and other domestic asset classes, including corporate bonds and less liquid investments. Markets have reacted over the course of the early hours and as anticipated, there has been a pronounced sell off in risk assets. At this point in time, the immediate sell-off in risk assets and the flight to safer investments is an understandable reaction, especially after markets rose over the last week as investors priced in a ‘Remain’ vote. Over recent years, financial markets have been driven by the expectations and reality of monetary policy, and today’s result will no doubt delay the path of monetary policy tightening in the US and the continuation of a more accommodative stance in the UK and Europe.
However, we should not over-read the impact of this event on global market volatility. Our investment partners global market outlook for 2016 has been dominated by expectations of heightened market volatility, triggered by events such as this. With the UK representing about 4% of global GDP, its ability to cause a major economic shock is limited.
In an environment which exhibits heightened volatility and where there is no clear direction for markets generally, we continue to advocate a dynamic and diversified approach. Risk management has been, and will continue to be, paramount in protecting returns for our clients. That is why virtually all of our clients are invested in well diversified multi-asset portfolios.
However, while the uncertainty presents risks, there are also opportunities. Remaining invested throughout this period ensures that your portfolio has the potential to benefit from any opportunities that may arise. Over the coming days and weeks, the ramifications of the UK’s decision will continue to be felt both domestically and internationally. The resultant market disruption comes as no surprise and our investment partners continue to identify ways to both protect against risks but importantly look for opportunities to add value where market reactions are out of line with fundamental expectations.
In the short term stock markets will fall and there will be a sense of panic in the media with headlines about millions being wiped off the value of shares. However, we have seen this sort of reaction before during the financial crisis of 2008, the 9/11 terror attacks and various other market downturns. What we know from those (and the various other “crashes” over the years) is that markets always recover. It is simply a case of being patient.
If you are planning for your long term future you really do not need to be concerned about short term volatility. This would only be a concern if you needed to cash in your entire portfolio in the short term.
It is certainly possible that portfolio values will drop in the coming days and weeks, but as long as you continue to focus on your longer term goals and hold a diversified portfolio, it really is just a case of doing nothing and waiting on values increasing again. Due to the diversification we include in all our client portfolios, our advice has not changed. Stick with your portfolio, let the fund managers look for the opportunities that will arise as a result of the volatility and just get on with your normal day to day activities without worrying about your investments.