27 June 2016
The decision by UK voters to leave the European Union has provided a material shock to global financial markets. Market volatility is always concerning for investors. At the same time reacting to market volatility without obtaining advice may not align with your long term financial needs and objectives.
Financially speaking, the outcome of the UK referendum vote had a binary outcome with an asymmetric risk profile to the downside. That is, in the event of an ‘Exit’ vote, the risk to financial markets and risk assets was greater on the downside than the risk of any positive outcome from a ‘Remain’ vote.
There will be a wide range of impacts to global financial markets, however the outcome of this event is unprecedented and the true impact of the UK exit on the global economy is likely to remain highly uncertain in the near term.
Economic growth rates are likely to move lower than current expectations as will the outlook for riskier asset classes such as equities. Politics are also likely to come to the fore in a range of countries, particularly in the UK but also in continental Europe given the upcoming Spanish election and Italian constitutional referendum. Pressure will remain on central banks (particularly the Bank of England, European Central Bank (ECB), and Bank of Japan) to provide further stimulus measures, and markets are likely to price in a cut to the UK policy interest rate in the near term (it has remained at 0.5% since early 2009). The impact will also be felt far wider than the Euro zone and the US Federal Reserve is now even less likely to raise interest rates. It is hard to see any further interest rate rises in the US in 2016.
The outcome in markets to-date has seen a ‘flight to quality’ across a range of asset classes such as government bonds and we expect this will continue to be the case given the uncertain impact of this event. Equities are likely to remain volatile for a period. Credit markets are also weaker across the board. Currencies have seen very large intra-day moves, and the British Pound hit a 30 year low and has traded in a very large 10% intraday range. The Australian dollar logically fell as did the Euro and capital flowed into the safe haven currencies such as the US dollar and the Japanese Yen.
In periods of high market volatility, particularly when political events are involved, it is sometimes prudent to consider increasing holdings of cash. At the same time remaining a focus on long term needs and objectives, and obtaining quality advice prior to making potentially rash financial decisions is important. Using professionally managed and diversified portfolios which take into account both return and risk is important. Given the uncertain impact of today’s outcome, the fallout from the Brexit vote will continue to be play out over coming days and weeks. We will continue to assess all information as it becomes available and will look to provide an update of our additional thoughts in the coming weeks.
We are reminded during these times of heightened uncertainty and market volatility of the benefits of a truly diversified portfolio strategy. By diversifying risk across a range of factors, rather than the portfolio being dominated by any one risk factor (such as equities), it is our view that the potential for preservation of capital exists during times of market stress.
Please feel free to contact us should you have any further queries.