Brexit – Into the unknown

Value of the benchmark FTSE100 index following the EU referendum
Value of the benchmark FTSE100 index following the EU referendum

The UK referendum on EU membership has split the country’s electorate in two following an unpleasant and divisive period of electoral campaigning.

There was no such split from the currency and equity markets which were firmly in the Remain camp. Both the value of Sterling and UK stock markets (along with equity markets globally) tumbled on the news of Brexit.

Markets hate uncertainty and whilst there is absolutely no doubt that the result is viewed as negative for the UK economy, the markets are also reacting to the fact that no-one really knows what happens next.

Firstly of course it is worth remembering that this result isn’t legally binding. The next steps for UK to extricate itself from the EU will be decided by politics, not by the law.

Citizens of the UK will now have to go through a period of reconciliation and one hopes that the next Prime Minister (following David Cameron’s resignation), will be able to rebuild a sense of unity, whilst policymakers struggle to implement the will of the people in unchartered territory. The next Prime Minister is likely to be the person who is tasked with triggering the so called ‘Article 50’ which gives both sides 2 years to reach an agreement on terms of the split.

The uncertainty doesn’t end there though. There is the possibility that other, particularly right-wing nationalistic politicians across the Euro-Zone will try and seize the moment and start to campaign for referendums in their countries.

Voting returns also clearly highlight the difference in attitudes to the EU across regions in the UK. Scotland and Northern Ireland both voted to remain within the EU, and there will now be calls for the Scottish Referendum to be re-run given that the previous vote was for membership of UK as part of the EU.

Some analysts believe that in the medium-term the UK economy will benefit from greater independence. In practical terms though the markets will react to all this uncertainty negatively with heightened volatility, and sharp falls in asset prices. As investors we should be prepared for significant movements in asset prices.

Equity markets will initially fall of course, but will also be liable to strong upward movements when participants feel any sell-off is overdone. Gold and bond prices will rise whilst risk assets are likely to fall. Trading funds such as those found in some of the AAM portfolios may be able to profit from such extreme price movements but in the short term the impact is likely to be negative for most asset prices.

There is also likely to be weakened liquidity in many markets; meaning that there could be a large difference between the asking prices for buy orders and sell orders. In this environment we urge caution when making investment decisions. Sell and buy orders placed without having extremely good pricing data may transact at unusual and unpleasant prices. We realise many investors are looking to take advantage of low equity prices; in this cases, it makes sense to look at assets with high levels of liquidity.

As in many such cases, there is a strong argument for doing nothing. Whilst in the short term markets will be very volatile, price action will normalise and the markets will take comfort from a better understanding what comes next.

If you have specific concerns or want further information, please contact your AAM Financial Planner.

Sources
http://www.ft.com/cms/s/0/7a888f22-39a2-11e6-9a05-82a9b15a8ee7.html#axzz4CT2yhfa4
http://blogs.ft.com/westminster/liveblogs/2016-06-22/
http://edition.cnn.com/2016/06/24/europe/brexit-steps-to-leave-eu/index.html

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The intended recipients of this document are only existing and prospective customers of AAM Advisory Pte Ltd. This document should not be construed as an offer, solicitation of an offer, or a recommendation to transact in any products/securities mentioned herein. The information does not take into account the specific investment objectives, financial situation or particular needs of any person. Advice should be sought from a licensed financial adviser regarding the suitability of the investment product before making a commitment to purchase the investment product. Past performance is not necessarily indicative of future performance. Any prediction, projection, or forecast on the economy, securities markets or the economic trends of the markets is not necessarily indicative of the future performance. Whilst we have taken all reasonable care to ensure that the information contained in this document is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness.