Observations and Thoughts
Whilst we now know the result, what’s a little unclear is how the next few months will pan out, and so I’ve put together a few thoughts and observations.
We had already made provision for uncertainty in our portfolios. Earlier this year we had built in some defensives to cope with the China slowdown, and more recently we fine-tuned these in the run up to the vote.
This has helped provide a degree of comfort, however in the near term we will experience a period of political as well as financial uncertainty. We have therefore entered some stormy waters but in my opinion this is not like 2008, but perhaps more akin to our exit from the Exchange Rate Mechanism in September 1992.
The difficulty for the Bank of England is that it does not have the same levers to pull in greatly reducing interest rates to stimulate the economy, but Mark Carney has come out and said he will do whatever it takes to calm markets.
The vote is a ‘global event’ and will likely prevent the Federal Reserve increasing US interest rates until later this year. This will hopefully bring some support to equity prices once the initial reactions to leaving the EU have subsided.
In the face of economic, financial and political uncertainty we must stay positive, but remain vigilant. The weather will be stormy for a while, and it’s a bit like the pilot turning on the ‘fasten seat belt’ sign. However, we have been here before and come through any previous storms with positive results.
UK VOTE : Out Of Europe
Friday 24th June, 2016
- There will be a near term period of financial and political instability
- We see sell offs in global risk assets creating buying opportunities
- The vote does not change our management of client assets
- The UK’s decision to part company with the EU brings with it challenges in the near term as we adjust and transition to exit. We expect Europe to give no quarter, as it tries to stop contagion to other members who may wish to follow. We see positions hardening with no quick settlement.
- David Cameron has announced he will resign as UK Prime Minister by October with a new leader to be appointed by the time of the Conservative Party conference. Two Labour MP’s have submitted a motion of ‘no confidence’ in Labour Leader Jeremy Corbyn, with a full blown leadership challenge a real possibility. We see a second Scottish Independence vote on the cards, once Article 50 has been invoked.
- We expect the UK divorce to be drawn out, with Article 50, the legal structure to leave the EU, not being invoked until October. From this point the UK then has a further two years to complete its negotiations. We see potential losses before any gains are achieved through not contributing to the EU.
- We see pressure on EU states to comply with an ever fraught EU central office, which could shock them into quicker federal integration or create further splits as it tries to reform itself.
- We see the Bank of England doing whatever it takes to calm markets with further QE and interest rate cuts back on the table if required.
- We see the possibility of indiscriminate selling which could translate into buying opportunities. For example US markets are only marginally affected by the UK’s exit from the EU. We see the Federal Reserve putting back it’s plans to raise US interest rates, which could help stabilize world equity markets in the coming months.
- We see a short term ‘freeze effect’ on companies spending their cash, deciding instead to keep what they have, until greater clarity comes through.
- Risk management will remain our central theme, watching closely and being protective of capital, whilst being open and adaptive to opportunities.
Austyn Smith is a leading advocate of the ‘risk managed’ approach and ‘all weather’ investing, and has been featured as a Citywire ‘Cover Star’ in both 2010 and 2013.
Following his work on risk reduction strategies, in 2011 he was recognized by Citywire Wealth Manager magazine as ‘Being in a position of some influence among your peer group, and likely to take a leading role in setting the investment agenda for UK Private Client managers.’
Austyn has recently contributed to leading publications by Citywire, and the Institute of Directors, and over the years has been quoted in the Sunday Times, Mail on Sunday, The Independent, and Bloomberg Markets.
With over 25 years wealth management experience, Austyn lives with his wife and children, Black Labrador and Springer, in Beaconsfield, Bucks.
Research Sources: Bloomberg, Financial Times, Wall Street Journal, John Authers, Robert Schiller.