Investments

INVESTMENT LINE: EU REFERENDUM MARKET UPDATE - JUNE

Investment Line is a regular investment bulletin produced by Mattioli Woods plc. The communication provides an update on funds, highlights some of the areas we are currently focusing on, and our thoughts on the most important matters of the day.

 
5 minutes

Investment Line is a regular investment bulletin produced by Mattioli Woods plc. The communication provides an update on funds, highlights some of the areas we are currently focusing on, and our thoughts on the most important matters of the day.

INITIAL THOUGHTS ON THE UK VOTE

Increased coverage of the EU Referendum, the results of (as it turns out, mainly inaccurate) polls and other global news weighed heavily on equities in the UK until this week, when right up to the close of markets yesterday (Thursday) there was a strong rally in the asset class, and in Sterling. Not even 24 hours later, we are seeing what we feared in the event of a vote to leave the EU – chaos in currency markets and significant falls in equity markets, led by the UK and Europe, but including Asia and the US. We still have to consider whether the Federal Reserve will raise US rates, the impact (if any) of Trump vs Clinton in November’s Presidential elections, low interest rates, low inflation and a world seemingly fixated by the level of China’s GDP.

We said here last month “relatively sanguine equity markets can turn quickly” and so it appears first thing today, with investors reacting, of course, to the seismic (and clearly unexpected) vote (by nearly 52% of UK voters) to leave the EU. We believe in the fundamentals of assets when making investment/allocation decisions, but sometimes sentiment has the momentum. As of today, both seem aligned in driving stocks down. Markets tend to discount bad news early and think about it later; however, this looks like the start of a period of significant uncertainty, and investors dislike that almost more than bad news. We have to consider how to react to markets that may or may not be over-reacting, and there is some history to consider (as, of course, Churchill would always insist we do), despite this being an unprecedented decision (unless one counts the Tudor Brexit of 1534).

A recent study by Schroders and Financial Express shows that whilst ten days after the biggest one day falls in the FTSE All-Share index (driven, of course, by the behemoths of the FTSE 100), markets were usually even further off, one year later there had invariably been a significant recovery to an average c. 16% positive return. We always felt that the “upside risk” of a vote to remain, given other economic and market concerns globally, was limited. The “downside risk” looked higher, but was equally unquantifiable, and so it is this morning.

Considerations for our investment team include the future for the EU, the potential for action from the Bank of England to “protect” Sterling, the equal possibility that inflation may rise as a result of increased base costs, other central bank action, lower GDP as the continuing (increased) uncertainty reduces business investment and consumer spending, the possibility of a political vacuum in the UK and Europe, and indeed the aforementioned issues in the US, China and beyond.

Rest assured we take our responsibilities very seriously, and will be in touch again soon.

**SINCE INITIALLY PUBLISHING THIS EARLIER TODAY, 24 JUNE 2016, WE HAVE HEARD THAT PRIME MINISTER DAVID CAMERON GAVE NOTICE OF HIS INTENTION TO RESIGN, AND OF COURSE THIS IS ALSO BEING TAKEN INTO ACCOUNT IN THE WAY IT MAY HAVE AN ECONOMIC AND/OR INVESTMENT EFFECT.**

Investment Line is written and edited by members of the Mattioli Woods Group Investment Committee, and is for information purposes only. It is not intended to be an invitation to buy, or act upon the comments made, and all/any investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances.

Mattioli Woods plc is authorised and regulated by the Financial Conduct Authority.

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