So Britain has voted, in what some are saying is a shock result, to leave the European Union. This clearly represents a very significant decision for the UK, for the European Union and indeed for the wider global economy. Markets have been clearly shocked by the decision but in reality is it as bad as the “journalists” are making out?
An independent report commissioned recently by a prominent UK investment house on the subject concluded that Britain’s long-term economic future would be largely unaffected by a decision to leave the European Union. That is not to say there won’t be challenges in the near-term. There will. There will probably be a period of uncertainty as the exact terms of Britain’s exit from Europe are negotiated. Financial markets loathe uncertainty as amply demonstrated by this morning’s reaction across all asset classes. However we should adopt the British way now of “stay calm and carry on”.
Following this momentous descion, it is worth reminding our clients of a few important things. On the 20 February 2016, when David Cameron announced that the EU referendum would take place, the FTSE 100 index was at 5950, the 10 year Gilt yield stood at 1.41% and the sterling / dollar exchange rate was 1.44. Since then the equity market has risen 6.5% but that rally has been quite narrow, being led by oils (+15%), and the mining sector (+18%).
Clearly, in the initial after math, markets have responded negatively to the uncertainty that follows this vote, and may continue to do so for some while. However, we all have to peer through this short- term uncertainty and focus on the long-term fundamentals of the economy and the businesses in which we invest.
The global economic backdrop will continue to be challenging, regardless of our membership of the EU. In the longer term, it is thought that the trajectory of the UK economy, and more importantly the world economy, will not be influenced significantly by the outcome.
Although market conditions such as these can be unsettling, we would strongly urge investors to look through this period of uncertainty and focus on the long-term opportunity which, in our view, continues to remain attractive.