UK Out of the EU

by Magical Penny on June 24, 2016

We woke up this morning (or stayed up all night…) to learn the UK is leaving the EU.

leave

It’s come at the end of what has been an intense, arguably dis-organised  and definitely tragic campaign.

The markets have predictably reacted negatively with both equities and currency falling sharply in early trading. It now seems we’ll enter an extended period of uncertainty both for the UK and the European Union (EU) as the details of the exit are worked out. In the grand scheme of things, the near-term economic impact is likely to be limited, but there is a risk that the shock of the result triggers wider pent-up concerns around more substantive factors.

As an investor however, you should sit tight and don’t make any rash moves. You should not be investing with money you need in the next 5 years at least, so by selling now you are only going to crystalise a paper loss.

With a vote of 52% the electorate has instructed the Government to begin the process of negotiating an exit from the EU. This has never happened before and is likely to be protracted and difficult. On purely economic grounds, many will want as orderly and amicable a process as possible. However, with a number of polls on the continent showing increasing dissatisfaction with the EU and growing separatist sentiment, there is a very strong risk that the politics overrides the economic and investment case.

In such a scenario, the incentive for EU politicians would seem to be to make any exit as painful as possible to quell domestic factions which could lead to further disintegration of the trading bloc.

In the last week or so the initial market sentiment seemed to have shifted to favour a Remain vote. The pressure valve that is the currency has seen sterling fall particularly sharply, touching levels not seen since 1985, while global equity markets are deeply into negative territory. Whilst market swings witnessed in the run up to the election had more to do with investors trying to second guess one another than true market impact, the prospect of protracted uncertainty across the UK and Europe is likely to keep volatility elevated.

Mid- and small-sized companies are likely to face more pressure being more tapped in to the UK economy, compared with the big multinationals that most investors hold in their portfolios.

In the long term the economic impact of the UK leaving the EU is effectively unknowable, but many analysts expect the impact to be relatively limited.

That said, perhaps one of the major investment concerns from this vote is the risk it becomes a trigger for pent-up concerns across Europe. Not only is political instability likely to drive volatility in markets, there are also worrying signs of a growing appetite for government interference in the actions of nominally independent Central banks, just as the unconventional monetary policy experiments extend further into the unknown.

Uncertainty around how the UK actually leaves the EU and on what terms will remain for the foreseeable future, but is likely to fade into more of a background process.

Bottom line: this result should not change your long term financial planning, but the increased volatility over the next few weeks and months might make following your investment performance in the short term a little more scary.

Stay the course.

 

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