As many of you will be aware, there has been much talk about the UK exiting the EU (BREXIT) over the past few weeks. Early this week, we saw the markets rallying on the expectation that this would not happen.
The release of the results of the referendum last night has revealed that the UK has voted to leave the European Union. This unexpected result has come as a shock.
The first communication I received in this regard this morning was from Anchor Capital. I have found the perspective offered a useful one, and am sharing it with you in the hopes that you will also derive benefit from the insight.
The implications of this decision by the British public are profound:
- It raises question marks about the future integrity of the EU, with France’s National front already calling for a referendum on EU membership. The departure of the third largest economy from the EU could well herald the latter’s break-up in time to come.
- Given the importance of the EU economy, (one-quarter of global GDP) and the possibility of a reduction or disruption in trade flows, global GDP growth is likely to suffer from this decision.
- As a result of the above, a protracted period of profound uncertainty and volatility can be expected in global capital markets.
- Global equity markets have already reacted sharply, and we expect many indices to open down 5-10% today. Importantly, the extent of the pace of recovery from these levels will likely differ sharply – while the initial response across all equity sectors (except gold) will be negative, the fundamental impact will differ markedly across companies. For example, we would likely hold the view that this decision could be negative for the UK housing market due to higher loan to value (LTV) ratios being implemented by the banks; this would be negative for UK banks and property companies.
- The cost of money is likely to remain very low, with the ECB already indicating (following the referendum) it may add liquidity should this be required. This decision pushes out the pace of monetary policy normalisation in a meaningful way.
- Given the point made above, we will closely assess the market impact on our client portfolios and share price responses will determine our action – in some instances, we may be inclined to add on weakness, and in others we may indeed well sell.
- On the positive front, there can be no doubt that market over-reactions will occur and this will create money-making opportunities.
The rand weakened over 7% against the US$ this morning, but is currently only 4% down, and in local markets this provides some respite for the shares which have foreign exposure outside of the UK (e.g. Astoria with close to 50% US$ cash). We expect the local market to decline in the region of 5% today, with risk assets such as commodities impacted the worst. The local bond market is reflecting 10-year bonds moving out around 0.3%, which in the context of global markets is fairly benign. At levels much higher than this, buying opportunities will start to present themselves.
Most importantly, now is the time for level heads with respect to money management. As a result, decisions we take in client portfolios will focus carefully on the referendum outcome’s likely long-term fundamental impact on the companies we own. We will not be drawn into knee-jerk market reactions, which are not backed by fundamentals.
We at Chartered will send out a further communication on Monday when there will be a clearer understanding of the implications.