Referendum Reflections

INVESTMENT SPECIALIST DAVID WARREN AT DISCRETIONARY INVESTMENT MANAGERS CHARLWOOD IFA SHARES HIS INITIAL VIEWS FOLLOWING THE EU REFERENDUM ON THURSDAY 23 JUNE

So once again the pollsters, and the markets, got it wrong; last Thursday’s buoyant markets that saw Sterling hit £$1.50 and the FTSE 100 rise above 6300 suggested a level of confidence prior to the Referendum outcome that was clearly unjustified.

Here’s a brief re-cap of how the world lay before Thursday’s vote:

• Global growth was slowing, not just in Europe but in the ‘self-sufficient’ US as well
• There was a disconnect, most markedly in the US, between company share prices and their underlying earnings
• Interest rates were falling, with the exception of the UK, where rates were on hold, and the US, where the path was thought to be upwards
• Monetary stimulus (QE) from the European and Japanese central banks pushed bond yields to record lows

And here’s what we’ve seen post-referendum:

• Government bond yields have fallen to new lows; the benchmark UK 10-year gilt yield has fallen below 1% for the first time, this despite a fall in its perceived credit-worthiness
• Sterling hit a 31-year low against the US dollar
• As at Friday’s close there was a large disparity in equity returns. The FTSE 100 was down just over 3% from Thursday’s close but, because of the currency weakness, the US S&P 500 was nearly 5% higher in sterling terms. Asia and emerging markets told a similar story but European shares fell by around 1%
• Spanish elections passed without drama. Voters still can’t decide on who should govern them but a lack of protest vote for the anti-EU party reassured markets

What lies ahead?

Most worrying for markets will be the period of uncertainty ahead; we won’t know the true economic impact for some time, but it’s reasonable to expect short-term economic weakness with the current environment unlikely to boost investment intentions. The main central banks are on stand-by to provide support and the UK authorities have tried to re-assure investors that they have a short-term plan for stabilizing markets. Of far bigger concern is the political vacuum at a time when strong leadership is key, initially in restoring confidence but secondly in leading the complex negotiations in exiting the EU.

As things stand, stock-markets aren’t as low as during February’s short-lived panic, the percentage losses being magnified by last week’s pre-referendum rally. Interest rate rises look to be off the cards for this year and markets are now factoring in a UK cut in rates.

One thing that we can say with some certainty is that volatility is likely to remain for the rest of the year. In addition to the likelihood of two leadership elections in the UK and post-referendum disquiet in Scotland, Northern Ireland and possibly across Europe, the world will have to take seriously the prospect of President Trump.

It would be insulting to disguise or make light of the current negative mood, but that’s where we as discretionary fund managers look to preserve wealth and seek opportunities for long-term gains. Here are a few examples of how we have guarded against the worst of the recent turmoil:

• Our small weightings in gold stocks have continued to rise and are now up by over 80% year-to-date
• Our weighting in overseas funds have produced positive returns due to the currency effect
• We have deliberately avoided funds with a high exposure to bank shares; some bank shares have fallen by over 30% post-referendum 

Our reputation has been built upon navigating through these difficult market conditions and we assure you of our continued commitment going forward.