24 June 2016

Beware of what you wish for

So the bookies got it wrong – or perhaps more correctly, the betting public backed the wrong horse.

The fact that investors appeared to favour a Remain majority did not guarantee the result and allowed a pre-vote run in both equities and sterling, swiftly unwound in early trading. Markets do not like uncertainty – and leaving the European Union creates as uncertain a scenario as you are likely to get.

The Leave campaign win, apparently against the odds, has already caused further shock waves. We are to have a new Prime Minister – and perhaps even a General Election. Whoever takes over from David Cameron will doubtless be conscious of Gordon Brown’s experience, so gaining a mandate from the electorate – particularly given the clear disarray present in the Labour party – makes a degree of sense. More uncertainty for investors, then.

There is little else of note for investors to get their teeth into and determining what the consequences of Britain deciding against remaining in the European Union will dominate investment thinking for the foreseeable future. Billionaire George Soros, who famously bet against the pound remaining in the European Exchange Rate Mechanism and profited hugely as a consequence, warned that the slump in the pound then would be nothing compared with what we might face should we vote to leave. He was not wrong.

The message for markets is clear. While the initial reaction has been severe and is possibly overdone, it will be some time before conditions return to normal. The business of withdrawing from the European Union will be complex and lengthy and may well result in investment decisions being deferred. The good news, though, is that our domestic stock market is truly global in nature, with the majority of sales generated by our top 100 companies conducted internationally.

Two rather important known unknowns remain, though. First, how Europe reacts to this momentous news will be crucial. On the one hand, maintaining strong commercial and economic links with the world’s fifth largest economy must make some sense if the fragile Eurozone economic recovery is not to be derailed. On the other, a tough negotiating stance to deter other nations considering similar action may be considered more important.

This neatly brings us to the second. Despite any contingency planning that may have taken place, Britain’s decision is an undoubted body blow to a Europe reeling from the immigrant crisis and with many economic issues still unresolved. Some fear this may be the end of a great economic and social experiment, born out of Europe wide conflicts in the last century. It will be up to the core nations of France, Germany and the Netherlands to hold the Union together.

We may well look back at the turmoil the referendum generated as being overblown, but for the short to medium term the volatility the vote has engendered is likely to remain with us. Investment strategists will doubtless be rethinking their tactics, but life must – and will – go on. A considered approach to recent events is now required, but I for one will welcome a return to more normal trading conditions.

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