EU Referendum - Reflections on the result

Markets have been volatile over the two weeks. The pound moved sharply lower before stabilising at around 1.30 against the dollar and 1.18 against the euro. This represents a fall of around 10% and 7.5% respectively. The UK stock market, in contrast, fell initially but has substantially recovered all of its losses. These different outcomes in part reflect the mismatch between the UK quoted sector and the wider UK economy.

In contrast to the stock market, the pound’s initial weakness has not reversed, although the currency appears to have stabilised for now at its new, weaker level. The UK is running a record current account deficit, the measure of how much we have to borrow abroad to fund our imports. Traders have marked down the pound in the expectation it might be harder for the UK to borrow the money it needs in the future. In the longer term, a weaker currency might reduce the gap between exports and imports, reducing the need to borrow.

On the eve of poll, the UK Government had to pay 1.37% p.a. to borrow for ten years. This has now fallen to just below 1%. Large commercial banks too have seen a reduction in the cost of borrowing, with the ten year fixed rates they pay falling from 1.46% to just over 1%. This fall reflects in part a flight to safety, as well as market speculation that the Bank of England might cut base rates further following comments from the Governor. It also gives some comfort that the Government, far from facing a funding crisis, is in fact able to borrow for now at extremely low interest rates.

Many quoted British companies derive a significant proportion of their earnings overseas. A falling pound bolsters their profits. In addition, their exposure to the UK economy is small. As the pound fell, some companies suddenly looked very cheap, prompting bargain hunters to step into the market and share prices to rise.

Market indices conceal differing performance at a sector or company level. The share prices of many banks and house builders remain significantly below their pre-vote level, as do those of smaller and more UK focused companies. In contrast, large international companies, such as oil and pharmaceutical firms, have done well. In aggregate, the large cap FTSE100 is now above its 23^rd June level, whereas the mid-cap FTSE250 has yet to recover all its losses.

Savings in the UK remain protected by the Government backed Financial Services Compensation Scheme (FSCS), up to an aggregate sum of £75,000. The UK banking sector is now much better capitalised than ten years ago. The Bank of England has made £250 billion available to UK banks to ensure adequate liquidity.

Investment performance will depend on individual circumstances. Well diversified and structured portfolios will have protected against market uncertainty. Early indications suggest most portfolios covered by Weatherbys’ PRIME service have performed well, with the most common investment mandate that we have on behalf of our clients returning in excess of 2% from the start of the year to the end of June 2016. Any weakness in equity prices has recently been offset by higher bond prices and the positive impact of sterling depreciation on the sterling value of overseas assets.

It is, of course, still very early days. As markets and investors digest the impact of the vote, it is possible markets could again move sharply. There are a series of political events that could spook markets (or delight them). The temptation to fall prey to ‘greed and fear’ may overwhelm some, setting off a self-perpetuating series of events.

For us at Weatherbys, it is not prudent to attempt to second-guess what might happen – in truth no-one knows. We enter this uncertain period with a very strong and liquid balance sheet.

Our advice to you remains:

• act cautiously, do not allow the panic of others to affect your decisions;
• review and monitor the financial risks you face and seek advice and assistance where necessary;
• manage your foreign exchange exposures, hedging if further adverse moves could cause you difficulties;
• consider fixed term deposits ahead of any possible cut to Base Rate; and
• remember investment decisions should be for the long term. Consider reviewing your finances and what you want to achieve over the next five years with a financial planner.

The Weatherbys team remains available to help you with advice and assistance in relation to savings, borrowing, foreign exchange, financial planning and investments. Please call us if you would like to discuss any of these further.