BREXIT – Volatility here to stay
As voting closed on 23rd June, like most, I watched the start of the referendum results coverage and with Sterling rallying to 1.5 $/£, headed to bed expecting to wake to a ‘Remain’ vote confirmation. As my 10 week old son decided 3am was a good time for a feed, I reached for the phone to check the current standings. In amazement, I watched as Sterling was in freefall and result after result came in confirming the nations ‘Out’ vote. Congratulations to the polling companies on another stunning job well done, the UK had spoken and voted to leave the European Union!
As investment markets opened at 8am, with no calming statement from either the Chancellor or the Bank of England, there followed a short period of panic as investors (often selling blind through internet sites) tried to leave the party through a small door. As Mark Carney started speaking at 9am, rationality returned to the market, with stocks placed firmly into two buckets; UK focused businesses came under pressure, whilst companies with large foreign earnings saw strong gains (benefitting from a weak pound).
As time has passed this trend has amplified, and Sterling continues to trade at multi year lows against the dollar and a basket of major currencies. Following the ‘currency wars’ of recent years, many Central bankers around the Globe are looking enviously at such a devaluation. There are, however, firm winners and losers from these moves. UK exporters, domestic tourism and the large Cap FTSE 100 stocks stand to gain. The global reach of some larger UK groups with overseas revenue, such as drug makers, miners and energy groups, will likely provide a strong boost to sterling reported profits. Banks, small businesses, motorists and homebuilders all stand to lose from the increase in uncertainty, falling confidence and higher import costs.
For now it seems that volatility is here to stay. Both of our major political parties have collapsed into leadership battles, politicians across the EU are giving varying views on what the UK will and won’t be allowed to do and investors across the globe are struggling to work out just how important BREXIT might be, or even if it will ever happen! Whilst ‘Out’ was not our base case scenario, it was certainly something we had made plans for. It’s our job now to peer through this short-term uncertainty and focus on the long-term fundamentals of the domestic and global economy. The volatility seen since the vote serves to highlight the benefits of the diversified, relatively defensive portfolio positioning that we at Cave’s generally adopt for our clients.
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The value of an investment and the income from it could go down as well as up. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. Cave & Sons Ltd is authorised and regulated by the Financial Conduct Authority. Financial Services Register number 143715