Brexit: initial reaction – steering a steady course through short-term uncertainty
After months of campaigning we finally have an outcome and one that even the bookies couldn’t get right. The British public have made their choice and after losing the vote, David Cameron has already tendered his resignation: the UK will have a new Prime Minister by October.
While in legal terms the vote is only advisory, it seems unlikely our politicians will ignore the will of the British public. We’re likely to see an extension of this period of uncertainty with a long period of negotiations ahead.
Looking across the channel, Brexit may be a catalyst for change. A number of European nationalist and far-right parties are demanding their own referendums on EU membership or concessions from Brussels.
In terms of the markets, we’ve already seen predicted movements across all asset classes, including a significant sell-off in sterling this morning. Until there is greater clarity on what the decision to leave means, it’s likely we’ll see business investment (which has already been on hold for several months) remain static. It remains to be seen whether larger companies which have already announced intentions to reduce their workforce will now begin to take action.
So what does this mean for your portfolio? Our view is still that you shouldn’t put all your eggs in one basket. Spreading investments across a range of asset classes will diversify your holdings and should help to provide a less bumpy ride.
As we discussed in our recent blog Looking Beyond Brexit, there are a number of risks to the global economy. These include excessive debt levels, insipid growth, ageing demographics and a lack of investment. In this broader context, we have already positioned our clients’ portfolios defensively: raising cash levels, lightening our exposure to developed market equities while maintaining our absolute return strategies and a light allocation to fixed income.
Following the ‘out’ vote, we will continue to reduce exposure to UK commercial property. Furthermore we believe larger companies should benefit from a weaker sterling and our UK equity holdings will reflect this.
What happens next? After the initial shock of Brexit has passed, focus will shift to the practicalities. Once the Article 50 process has been triggered, talks will start with the EU and its member states. It’s worth noting that the two year deadline contained in Article 50 only relates to the divorce settlement and not the renegotiation.
Despite denials on both sides of the argument, would anyone be that surprised at a counter-offer from our European counterparts? I certainly wouldn’t.
As always, if you have any questions or concerns, please don’t hesitate to contact us.