The referendum, the fallout, and what comes next
The UK's vote to leave the EU dominated the month. Subsequent political events paid tribute to Machiavelli and were beyond parody, but resulted in Theresa May becoming Prime Minister earlier than expected and mob-rule in the Labour party. The sell-off in response to the Leave vote was sharp but not cataclysmic, and was generally short-lived, with the currency taking the biggest hit.
A vote to leave, a currency in retreat, and a tale of two indices
Stock markets moved higher in anticipation of a vote to remain in the EU. The sell-off in response to the Leave vote was sharp but not cataclysmic, and was generally short-lived, with the currency taking the biggest hit. There has been a stark contrast between the rise in the internationally-biased FTSE 100 index, up 5% since the vote, and the 3% decline in the mid-cap FTSE 250 index, which features companies more directly exposed to the UK economy. The drop in sterling to 31-year lows resulted in overseas stock-market gains of 10-15% in sterling terms.
Central banks were quick to announce supportive measures for markets and the banking system. Governor Mark Carney hinted that the deteriorating economic outlook would be likely to result in the Bank of England taking action to ease conditions over the summer.
Property funds suspend dealing as investors rush for the exit
One of the more immediate consequences of Brexit was the turmoil in UK commercial property funds. Initially, funds called in independent experts to assess the likely impact on valuations post-referendum. This resulted in downward revisions in the region of 5%, which led to panic-selling amongst investors. We do not yet know the amounts involved, but they were deemed large enough to cause funds to temporarily suspend dealing in order to protect existing unit-holders from fire-sale prices.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
The UK survived Brexit, but let us not get too carried away
So the UK survived Brexit. Our holidays might now be more Butlin's than Florida, but we have the golden scenario of a lower currency and record low interest rates to help industry. Shares have generally rallied well, especially overseas holdings in sterling terms. But let us not get too carried away.
It is a tired old phrase, but stock markets hate uncertainty; they even prefer bad news because at least then they know what they are dealing with. At the moment life is just a little more certain in that we now know the UK will attempt to leave the EU and that it has a new Prime Minister committed to some form of Brexit. This, plus the expectation of further central bank stimulus and interest rates remaining lower for longer, is driving shares and bonds higher.
But lest we forget, the US Federal Reserve is still committed to raising rates at some point, and the most recent stronger than expected jobs data from the US will only strengthen their case. Closer to home, a potential banking crisis is smouldering in Italy that might pit prime minister Renzi against his Eurocrat rulers. Further, the Eurozone has just announced that it will issue sanctions against Spain and Portugal (but not Italy and France) for making insufficient effort to cut their budget deficits.
The UK might well fall into recession. No one can be sure, but it is reasonable to assume that, at the margin, some projects will be scrapped and others put on hold until there is more idea of what form future trade agreements will take.
And still in the background remain two fundamental concerns: firstly, that there is too much debt around the world, and secondly that few, if any, assets look compelling when valued on current earnings. Further central bank support may well accentuate this without solving the problem of returning confidence to the economy, rather than stock markets.
Our holidays might now be more Butlin's than Florida, but we have the golden scenario of a lower currency and record low interest rates to help industry.
We made several adjustments to portfolios during June in response to the referendum result, focusing on currency exposure, locking in profits, and raising cash to take advantage of future opportunities.
Hedging the yen exposure
We used the sharp fall in the currency to switch our weighting in Japan into a similar fund but without exposure to the yen. This will benefit if sterling recovers against the yen in the future.
Rotating UK equity exposure
We locked in some profits on our UK income funds, reducing the weighting in favour of a low-cost FTSE 100 tracker, which could benefit if focus remains on companies with international earnings.
Raising cash from the post-referendum rally
We also took advantage of the post-referendum rally to raise our cash weighting by 2-3% by halving our holding in Liontrust Special Situations fund.
Gold as a hedge
Gold has continued to trade higher and remains a useful hedge against the perceived failure of central bank policies and the general uncertainty ahead.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
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