EU Referendum – UK decides to leave

Markets have delivered their initial reaction to the news that the British public has voted to leave the European Union. Over recent days, markets have moved to price in a high chance of a Remain outcome, so the result is one for which the markets were clearly unprepared. The pound has weakened against other currencies and at one point was down around 10% against the US Dollar. The leading UK equity index (FTSE 100) opened trading with a drop of around 8%, which has since recovered some of these early falls and, to add to a very eventful morning, the Prime Minister has announced that he is going to step down before October.

The result of the vote will see a period of uncertainty and adjustment as negotiating the UK’s exit from the EU will now proceed. Given the complexities of the issues involved, this is likely to take several years with very important aspects, such as Britain’s access to the EU single market, to be decided. The Treasury and the Bank of England have engaged in extensive contingency planning and, as a result, will take steps to keep the UK economy moving forward. We are now entering a period of economic, financial and political uncertainty. As a result we expect higher than usual volatility affecting UK and European equities, bonds and currencies. The reality is that such bouts of volatility are not uncommon and history has shown us that focusing on long term fundamental factors has weathered such periods in the past.

The majority of CFM’s portfolios are invested across a broad range of assets and geographies and as such will not be over exposed to the UK. The impact of Brexit will be felt globally and understandably affect markets around the world, leading to a fall in values over the shorter term. Our immediate reaction is to remain calm, as it is likely to take a few weeks for markets to stabilise. Markets have reacted broadly in line with what was expected, following a Brexit vote, and in times of heightened uncertainty it is important to maintain a sensible long-term view and avoid trying to second guess short-term market trends. This can be uncomfortable for investors, but selling assets during volatile markets can often result in poor outcomes.

We review our portfolios in a structured and measured way and we continue to monitor these, especially as events unfold over the next few weeks. We also understand that some fund management groups may put a temporary hold on trades to help them better manage the liquidity of their investments and this could affect any requests to buy or sell within these funds. We will be writing to you again in due course with our recommendations, however, should you have any concerns in the meantime please do not hesitate to contact us.

Posted on June 24th 2016

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