Was it only a week ago that the UK voted narrowly to leave the EU? Since then we have seen unprecedented events in the spheres of economics, politics and finance. In light of these events we felt that a further update on the Brexit would be welcomed.
As you are aware from our first post Brexit update world stock markets fell sharply on both Friday of last week and Monday of this week. Whilst the sell-off was steep it was nowhere near the severity predicted pre-referendum. It is also true to say that this sell off was concentrated on domestically focused shares, particularly banks and property stocks. For that reason the FTSE250 felt the impact more than the FTSE100 where most of the income is derived globally rather than from the UK.
The impact of the fall in shares was less than expected in part due to the devaluing of sterling which fell to 35 year lows against the Dollar and lost 11% value against Sterling. This meant that companies whose earnings are overseas saw the value of these sales increase.
Over the course of Tuesday, Wednesday and Thursday, whilst the political scene continued to be confused and the in fighting continued in both the Conservative and Labour party, financial markets continued to function well. The Bank of England provided Â£3 billion of liquidity to the banks, over Â£6 billion was available but not taken up showing the solid financial position banks are in (contrary to 2008).
Financial markets not only functioned well but the FTSE100 surged through its pre-Brexit level shrugging off concerns. At close yesterday the level of the FTSE100 was 6504 – a high for 2016. This was greatly assisted by the Governer of the Bank of England, Mark Carney, stating that monetary policy in the UK will loosen over the summer to assist the economy. What does this mean? A likely cut in interest rates next month to 0.25% and a possible restarting of Quantatative Easing (QE).
With markets rallying and the pound stabilising the doomsayers appear to have been proved wrong, but we are not out of the woods yet. We expect to see more volatility over the Summer as the UK negotiates its new position with the EU. As such we remain cautious in our outlook, whilst rates may fall in the short term we still expect them to rise in the long term. Inflation may rise due to the fall in sterling and this will increase the cost of goods and services.
The diversified nature of client portfolios, the actions taken pre referendum to de-risk equities and also to reduce domestically focused assets in addition to increases in cash and commodity holdings have all served clients well. We continue to monitor events, work closely with our investment managers and where appropriate take action. We will of course keep you updated if we feel its appropriate.
It’s going to be an interesting Summer…