We had expected the result of the vote to be close, but our conviction was nevertheless that the status quo would prevail.
The ramifications of this event will be far-reaching in my view. One thing stock markets dislike is uncertainty. The fact that we are now firmly in uncharted waters means key investment decisions such as capital spending and hiring by businesses, could be decidedly more muted. Uncertainty amongst corporates is not helpful for overall profitability.
As a result of these multiple factors, it is not unreasonable to assume that the UK will enter a period of economic recession, the key reason why we believed the outcome would be different from what has materialised today. George Osborne prophetically called it the UK’s ‘first DIY recession’. Only time will tell if that prophesy materialises.
It is difficult to say at this stage exactly what reassuring action the Bank of England may take, but it is not impossible to imagine that it may quickly cut interest rates in an effort to help steady nerves. Restarting the programme of monetary stimulus, otherwise known as quantitative easing – a feature that has been absent from the economic landscape for some three years now – also looks a possibility. At the very least, the central bank is likely to indicate its preparedness to take such action.
Immediate reaction in markets
The oil price fell by around 5% as the likely result of the vote became clear, suggesting expectations for a marked decline in global demand. Other early indicators have included falls in the Asian markets, including Japan, Hong Kong and Australia. Global bond yields immediately declined (prices rose) and the price of gold has risen sharply as investors seek perceived safe haven investments.
We believe that the prospects for domestically focused UK businesses, given their sensitivity to the UK economic cycle, are clearly the bleakest of all. By contrast, FTSE multinationals will, on a relative basis, almost certainly perform better than their domestically oriented peers as the weaker pound will support overseas earnings when translated back into sterling.
What does the medium-term hold?
Looking further ahead, it seems inevitable that the UK and European economies will face a period of two years of uncertainty, as the UK attempts to negotiate how to extricate itself from the European Union, while maintaining access to European markets.
The result, in our view, also has potentially very serious implications for the future of the European Union itself. A break-up of the broader union has today become a distinctly greater possibility, and we would not be surprised to see amplified calls from the Netherlands, Sweden, and Denmark amongst others to leave the EU.
In terms of the UK political landscape, David Cameron’s position as prime minister will now inevitably look strained, notwithstanding his earlier assertions that he would remain in post regardless of the outcome of the vote. He may nevertheless survive, as it may be felt that he is best placed to negotiate exit terms. Chancellor George Osborne’s current position is now similarly under threat, while the likelihood that he will become Cameron’s successor has all but evaporated.
Meanwhile, the result of the vote in Scotland shows a very different picture from that of England, with voters north of the border choosing resoundingly to remain in the EU. As such, the likelihood of a break-up of the United Kingdom has increased significantly.
Investment decisions will be made with careful consideration
Within equity markets, as ever at times of market stress, emotional reactions will mean that price falls will be exaggerated; this is the very nature of stock markets. As previously mentioned, the gold price was one of a very small number of bright spots as the result became clear; it immediately broke convincingly through the US$1,300/oz barrier, as investors looked for safe havens.
It is hard not to feel disappointed at this result, which we know is likely to lead to a difficult period for UK equity investors. As ever, we will do everything in our power to help our clients to navigate these market conditions; it goes without saying that any investment decisions we take will be made with careful consideration, rather than being knee-jerk reactions.