It’s ‘Leave’ – implications for markets.

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Ian Copelin, Investment Management Expert, comments “There are certain days you never forget and this will be one of them!

It was shaping up to be one of the best weeks for the FTSE-100 and the pound in years, with plenty of bullish sentiment.

That changed overnight as the vote results started to show the UK would ‘Leave’ the EU.

While in the long-term this could be positive for the UK and Europe in terms of much needed reform, in the short-term it will create uncertainty, which unfortunately will continue until it becomes clear what trading agreements the UK can negotiate between Europe and the rest of the world.

While there are many tons of dust that need to settle, today promises to be amongst the most turbulent days ever for financial markets as the market has to re-price itself given the referendum outcome.

I will write further Market Updates as the days progresses, as it is clearly too early to give any definitive implications, but here are some of the key impacts of the dramatic night and morning we have had in the UK:

  • The FTSE-100 has opened down 480 points (7.57%) at 5,850;
  • The pound has weakened to its lowest level since 1985 (when Margret Thatcher was Prime Minister) – a steeper fall than after Black Wednesday in 1992 when the UK exited the ERM.  Some of the moves in currencies against Sterling today:
    • Euro -5.23% to €1.236
    • US dollar -7.61% to $1.368
    • Japanese Yen -10.48% to ¥140.2
  • Despite already having a very loose monetary policy, it is likely that the Bank of England (BoE) will loosen further to support the economy through this shock – potentially via restarting its quantitative easing (QE) programme;
  • David Cameron will leave office within the next 3 months;
  • It is likely that the UK will lose its AAA credit rating at S&P.

However, this is not a time to be selling first and asking questions later.

There is no point pretending that everything today is rosy as portfolio values will be lower.  However, I would like to emphasise clients’ growth portfolios are globally diversified which helps hedge against any downturn in the UK.  In addition, the majority of the FTSE-100 earnings originate from abroad and the weaker sterling is a positive as it will increase the earnings of these companies.

Furthermore, even before today’s falls, company valuations looked attractive, but now given sterling’s weakness, UK companies may potentially become takeover targets, especially given their strong free cash flow generation and low corporate debt.”