EU referendum update

After the result from the UK’s EU referendum we now have certainty of uncertainty - uncertainty on all fronts (financial, economic and political) and as a result, markets are likely to remain volatile even after sizeable initial reactions. The uncertainty is naturally greatest in the UK and Europe where the longer-term economic and political relationship will take years to resolve.

For the most part, financial markets are reacting as we expected in light of the referendum result, with significant moves being seen - risk assets selling off and defensive assets such as US treasuries, gold and safe-haven currencies performing well. To some degree, these moves will have been amplified by the fact that recent more positive ‘Remain’ polls led to risk assets and sterling performing well over the last few days, although as we watch the markets there has been some moves back already reducing some falls. For example, global equity markets are off about 5% as we speak, with the UK down about 5%, Europe about 8% and US futures down 3%. Sterling (vs. USD) is down almost 6% having been down over 10%.

Having added some defensive positions (for example, reducing equity risk, buying US TIPS and adding to gold) over recent months we will be watching the markets closely for opportunities that come out of volatility, potentially taking profits on those defensive assets that have performed well and reinvesting in areas that have been marked down.

Some of the areas that we would be looking to invest, subject to market levels and valuations, would be UK large-cap equities, which have significant overseas earnings (that will benefit from a weaker sterling), US equities and UK index-linked gilts, taking care to take relative moves into account. Other equity markets may also have had their attractiveness altered based off significant currency and market moves.

It might take time for the dust to settle and for financial markets to find new shorter-term levels. In some markets, such as fixed income, we are seeing significant bid-offer spreads which is understandable given the levels of uncertainty and proximity to the weekend. This does mean we have to be much more careful with regard to decision-making and implementation. Particularly as more liquid markets such as currency and equity markets have been exhibiting larger moves making the timing of dealing more crucial.

Markets, and many investors, dislike uncertainty and as such risk premias will have increased as has volatility within markets. However, this will undoubtedly lead to opportunities for longer-term investors.

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