Union Jack

David Battersby provides insight into Brexit and its impact on investors and the financial market.

The big takeaway from Brexit is that this is a political, not a financial, crisis.

David Cameron has agreed to step aside for another to move the Country forward but even as the front runner is Boris Johnson, he will find it difficult to unite a mainly pro E.U. parliamentary party. Jeremy Hunt, the Health Secretary, who campaigned to Remain, called on the Government to delay invoking Article 50 and to hold a second referendum on Britain’s terms for leaving the European Union. Meanwhile Jeremy Corbyn, the Labour leader, may find his leadership challenged due to his lacklustre Remain campaign.

The fall in Sterling initially suggests that interest rates could rise, but the additional economic risks this would add to an already fragile economy means it is more likely that Interest rates will fall towards zero with a repetition of Quantitative Easing. Calls for referenda in other countries are currently unlikely as those calling for them are not presently in power.

The UK has now been stripped of its AAA rating by Standard & Poor’s, which warned that further downgrades could follow in the coming months. This is not necessarily negative as when this happened in the U.S., yields on Treasuries fell as investors bought more as they remained the lowest risk assets available.

GDP forecasts have been reduced from circa 2% to 1.5%, reflecting short term concerns in the domestic economy. However, after several days of self-reflection and false promises, we shall have to roll up our sleeves and deal with the situation.

The end result may probably be a similar agreement to that which we have currently. We will still have to contribute to the budget and accept migrants but will no longer be able to vote. Splendid isolation this time does not look clever. We still have to abide by the rules, but no longer have the right to wear the club tie.

Some analysts have said the market falls seen post the vote provide an opportunity for investors with cash and stating that selling at this juncture would be a mistake highlighting areas to benefit including higher yielding alternatives, overseas earners and oversold positions across alternative debt, blue chip equity and smaller companies.

Whilst we have seen great falls across Banks, Airlines and Builders, this may throw up opportunities. Property stocks have fallen badly but by contrast, those with a higher income such as Healthcare and Student accommodation have fared better. Market commentators say it is important that investors:

  • remain calm
  • are diversified
  • remain invested

Market timing does not work as a long term strategy and time out of markets means dividends foregone. As interest rates may now go even lower the hunt for sustainable income will continue and where quality large caps have pulled back there may be opportunities where liquidity is not an issue. Scotland could now also seek independence, causing turmoil for Edinburgh based banks such as Lloyds which may need to redomicile.