John Husselbee, Head of Multi-Asset at Liontrust Ltd gives his reaction a week on from Brexit:
John Husselbee: Brexit – a week on…
A week on from the historic Brexit vote, it looks increasingly clear that – for now at least – we are facing a political rather than a financial crisis.
Markets were initially wrong-footed by the Leave vote and we saw a classic risk-off trade in the immediate aftermath as the FTSE 100 fell sharply. Since then however, the market has more than recovered these losses – although it should be remembered that the blue-chip index has extensive overseas exposure and more domestic-facing mid and small caps are still down despite a rally.
Sterling has taken the brunt of the Brexit vote, down around 10% against the dollar and 7% versus the euro, and the currency has effectively acted like the share price of UK plc in recent days. For investors with overseas assets, this weakness has provided a performance boost and many are now weighing up whether the currency will drop further or it might be time to lock in some of these unexpected gains.
The pound’s decline should also be considered in light of ongoing demand for gilts in the UK, which has pushed 10-year yields below 1% for the first time on record. On the surface, this presents something of a conundrum: people are shunning our currency but still want our debt.
One explanation could lie in ongoing demand for safe havens and, in the beauty parade of developed market government bonds, gilts still look attractive versus German bunds and other European government paper.
We continue to reiterate our message throughout the long weeks of Brexit argument – investors should focus on the long term and the biggest risk is giving way to panic and abandoning a long-term strategy based on short-term anxiety.
Despite a volatile week, we are clearly nowhere near the crisis of 2008 in financial terms; politically speaking however, we may well be entering uncharted territory. The vote has revealed many faultlines in the UK – between generations as much as political parties – and there is still little clarity on how our exit from the EU might look in practice. Both main political parties face a period of upheaval and whoever takes over as Prime Minister must take on the task of uniting their party as well as the country as a whole.
Looking to Europe, the UK’s vote may also trigger calls from other EU nations to hold their own referenda. Whether offered by those currently in power or opposition seeking a vote-winning strategy, it could further endanger the European Union and increase speculation over a break up.
Amid an extended period of political uncertainty, we believe financial markets will function in an orderly fashion as central banks stand behind them. The measured response from the Bank of England so far looks set to continue, with many predicting an interest rate cut in July or August. We feel the government may also need to consider further fiscal as well as monetary stimulus, with perhaps a reduction to VAT or a cut in stamp duty potentially benefitting a wider swathe of the population.
Ultimately, no one can predict what the coming months and years might hold but we should be under no illusion that this vote has damaged the UK’s international reputation and economic forecasts will need – likely downward – revision.
Markets will move on and get distracted by other global events – we have five European elections in the next 18 months and the small matter of the Clinton/Trump battle in the US.
We always felt a leave vote could cause short-term asset price volatility and sold down some equity exposure and upped our cash positions in May to protect against this. If assets continue to be hit hard in the coming weeks, we would look to exploit this short-term anxiety as a cheap entry point for securities with good long-term prospects.
Reference to specific fund managers does not confer an investment recommendation and all comments are the views of the individual fund manager and not True Bearing and do not constitute investment advice.