Our clients rely on us to help them make good investment decisions, especially at times of uncertainty. Here Richard Urwin discusses the effects of Brexit and the work we've been doing to protect and grow clients' funds.
The Result is in - We Are Out
The referendum result is something of a surprise and a reminder of the folly of making predictions. The pound and the FTSE stock market index had been rallying in the days leading up to the 23rd June, a date that will enter the history books, and it appears from the reaction in markets that participants were surprised by this result.
The immediate reaction in global markets to uncertainty is to sell off “risk assets” and buy “safe haven” assets such as gold, US Treasuries and German Bunds. So no surprises over night with Far Eastern stock markets selling off, gold jumping in price, the Pound falling against all currencies and the Euro also falling against the US Dollar.
There will undoubtedly be coordinated action by central banks to ensure liquidity is maintained but there can be no doubt that the UK referendum result has introduced an element of economic and political uncertainty that wasn’t there before.
The immediate price reaction to shocks often moderates as the hours pass and that was the case this morning. The banks and the builders were the biggest fallers in the first few minutes of trading. Both sectors quickly moderated losses however and there were relatively low volumes of shares traded at the early low prices. The FTSE opened nearly 9% down, recovering to around 5% down within the first hour of trading. There will be winners as a result of a weakened pound and the pharmaceutical sector, which derives most of its earnings from overseas, is up on the day as too are exporters such as Rolls Royce who may benefit from a more competitive level of the Pound.
David Cameron has announced that he will stand down, prior to the Conservative Party Conference (2nd to 5th October) and importantly has stated that it will be for a new leader to decide when to file Article 50 of the Lisbon Treaty, which will formally start the two year exit process. At next week’s cabinet meeting, he has indicated that he will form a negotiating team to meet with the EU which will likely be led by a senior Tory member from the Exit Campaign.
It is always possible that material concessions may be forthcoming, and this timetable allows for the possibility of a second referendum on the same issue (note the Netherlands held two referenda on the Maastricht Treaty) although this has to be seen as unlikely. This would be a material influence on markets if it happened.
The political ramifications have started to unfold. As well as David Cameron’s resignation Nicola Sturgeon has stated that the future of the Scots lies within the EU, Sinn Fein has called for a vote on the reunification of Ireland (interesting). The political ripples will be felt further afield. Already a Dutch Eurosceptic party has called for a referendum in Holland and markets have begun to express their views on the chances of change in Southern Europe by selling Spanish and Italian government bonds.
Chesterton House Investment Portfolios
Whilst we did not expect a vote to leave the EU, our Investment Committee has been considering the effect on our portfolios in their asset allocation meetings over the last 18 months. Elements of the portfolio were expected to be defensive and this has proved to be the case. Gold has jumped in dollar terms, and with Sterling’s depreciation and the operational gearing that is provided by investing in gold miners shares, we can expect significant support from this important element of our portfolios.
The fall in Sterling has also been positive for other elements of the portfolio, European Property and Overseas Equity. Overall we expect to see a far more muted fall in portfolio values than that seen in UK equity markets and typical managed funds.
The defensive elements of our portfolios including the infrastructure funds and alternative property sectors will provide stability and ongoing predictable income yields. The fall in Sterling is expected to raise inflation over the coming year and we are well positioned against rising inflation and many of these funds receive income which is directly linked to RPI.
We have received a plethora of emails today from fund management houses and economists. These contain a range of views as to the short, medium and long term effects of the decision which has been taken.
One report which you might like to read if you are interested is that which Woodford Asset Management commissioned from Capital Economics, which can be found at https://woodfordfunds.com/economic-impact-brexit-report/
Our portfolios are diverse and are positioned to be able to ride through periods of volatility. The natural income yield together with the cash flow planning that we do carefully with all of our clients will ensure that investments do not need to be sold when prices are depressed. We strongly believe that it is futile to attempt to time markets seeking to benefit from rises and avoid short term falls in price.
Rather we believe in long term investment in a diverse range of quality investments, an approach that has worked very well for our clients over many years. Whilst constant revision and appraisal is necessary when financial planning we do not expect the events of the 23rd of June to have a significant impact on our clients financial plans.
We will continue to review our recommended investment portfolios, and make adjustments over time as circumstances develop. Our primary concern in managing money for our clients is to preserve their capital over time, so that they can face the future with confidence.
If you have any questions about our approach, or would like to know more about how Chesterton House manage money to help people achieve their goals, contact us via our website and we'll be happy to explain in more detail.