Turning point

The referendum result was prologue and a new chapter awaits.

It is undoubtedly a significant decision, with ramifications for the UK, the EU and the wider world. The UK prime minister has already given notice that he will step down by October to allow new leadership to negotiate the UK’s future, but for now the implications remain almost entirely unknown. For the UK to leave the EU, it must first trigger Article 50 of the Lisbon Treaty, and then start exit negotiations in order to determine the UK’s new trade arrangements with the trading bloc. David Cameron said in his resignation statement that he would leave the job of triggering the exit clause to his successor, meaning those important negotiations cannot begin before his departure from Number 10.

 

There may be immediate political implications in continental Europe too. Given that recent polls show high levels of Euroscepticism in a number of major European countries, there have already been calls for copycat referendums elsewhere, albeit by those who remain outside the political centre. There are certainly broader questions about how the EU will respond.

 

Whilst the referendum has supplied the answer to the question of whether the UK remains in the EU, it has raised a whole new series of questions in its stead. Some of these will take months – perhaps even years – to answer. Mark Carney, governor of the Bank of England, said that “some market and economic volatility can be expected as the [negotiation] process unfolds”. He went on to explain that the Bank of England has prepared for such a scenario.

 

Some initial adverse market reaction was to be expected, and the immediate response to the vote is likely to be the most extreme, until details emerge about what the next steps will be. In fact, once the initial shock has been absorbed by markets, there are reasons to believe markets may become more settled, not least because the main uncertainty has now been removed.

 

In an environment of uncertainty, it is crucial that investors keep short-term volatility in context and avoid the temptation to allow such fluctuations to influence long-term plans.

 

Moreover, that sense of uncertainty has been heightened by the fact that markets had not expected a vote to leave.

 

Investors are already turning to consider the impact on different sectors – financial companies are expected to draw plenty of attention, at least in the short term.

 

Investors need to remember that negotiations to leave the EU have not yet begun and are expected to last for years. Even the leaders of the Leave camp forecast that, in the event of a vote to leave, the UK would not end up quitting the EU until 2019 or 2020. This means that the UK’s departure from the EU, and precise details of its new trade arrangements, will emerge only gradually. The initial turmoil experienced on markets will not persist ad infinitum. Trade negotiations are a good deal less exciting for markets than referendum votes. The UK will remain a member of the EU for several years, and the rhetoric of policymakers is now likely to shift towards reassuring markets, rather than scaremongering.

 

 

 

 

 

 

 

Of course, the economic and financial ramifications of Britain’s decision extend across the Channel too, albeit on a smaller scale.

 

Looking through the short-term noise in markets isn’t always easy, but it remains the right course for investors who know that they need to remember the long-term record of real assets in providing capital growth and income.

 

Investors should remind themselves of the following:

 

  • Indiscriminate market falls ignore the qualities of individual companies and provide opportunities for long-term investors to benefit by taking advantage of cheaper prices.

 

  • Inevitably, some companies will struggle in the difficult economic environment that may result, or will be unable to adapt to the new world. In contrast, strong management teams will take the necessary and potentially difficult steps to make the changes that will benefit their company – and its shareholders – over the longer term. It is the job of expert and active fund managers to identify those companies and buying opportunities.

 

  • Sharp market falls are always unsettling, but it is important to remember how stockmarkets have behaved in the past after such shocks. In October 2008, on the worst day of the financial crisis, the FTSE All-Share index lost 8.3%, yet one year later it had returned 26%. Looking longer term, after a one-day fall of 5% in February 2009, the FTSE All-Share returned 126% over the following five years. (Source: Schroders/Financial Express, June 2016. Please be aware that past performance is not indicative of future performance.)

 

  • Although there may be a temptation to seek the perceived safety of cash, the dilemma for investors is then the difficulty of timing a move back into the markets. Furthermore, it has already been suggested by the Bank of England that a vote to leave may even prompt a further cut in interest rates. Whether or not that happens, it does seem likely that returns on cash will remain at very low levels for some years to come.

 

  • These events underline once again the value and importance of creating and maintaining a balanced and well-diversified portfolio, which should help cushion investors against the worst effect of short term market fluctuations. The value of investing in global assets has already been demonstrated, as the drop in sterling will help cushion the impact of falls in the value of international holdings.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The referendum result may yet alter a great deal about the United Kingdom, but it does not alter the principles of investing or the need for individuals to take action to ensure their long-term financial security.

 

An investment in equities will not provide the security of capital associated with a deposit account with a bank or building society.

 

 

 

To receive a complimentary guide covering Wealth Management, Retirement Planning or Inheritance Tax Planning, produced by St. James’s Place Wealth Management, contact Roy Duns of St. James’s Place Wealth Management on 0191 385 1530 or email roy.duns@sjpp.co.uk.

 

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