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Week-32-2016Nearly six weeks have now passed since the shock waves from the UK referendum ‘out’ vote buffeting global markets throughout that final week of Q2-2016, evidencing that market participants had assumed and priced in a remain vote, which took us and others by surprise.

The morning after was certainly a roller coaster of not just panic, but also many potential unknowns. What followed, as we know, was an initial sharp decline across UK listed equities, most notably across the mid- and small-cap sectors, where domestic-facing businesses predominate. Investors in UK blue chips fared much better, meanwhile, both during and after this sell-off, as the Pound’s 10+% plunge to a 31-year low against the U.S. Dollar provided a significant boost to FTSE 100 companies (see chart), which derives around 70% of their earnings from overseas.

Week 32-2016 chart

Touching on global markets, in the US the S&P 500 fell by over 5% in the two trading days after BREXIT, thus adding to the dovish tones of the FED/FOMC (not wanting to add to market volatility) and supporting a hold stance on their potential tightening of monetary conditions throughout 2016. That has assisted the U.S. market’s subsequent bounce back – which can’t be said for European and Japanese equity markets, which have suffered further declines.

As always, there are winners and losers to such geo-political events. In this instance, it was most definitely the holders of UK, U.S. and European sovereign debt. Reflecting investor uncertainty, 10-year yields are, at the time of writing, back to near all-time lows of 0.80%, 1.55% and -0.04% respectively.

Interestingly, from a domestic political standpoint, despite swift actions and fairly forceful words from the SNP leader and Scottish First Minister Nicola Sturgeon, a recent poll suggests that Scots would now vote to stay in the UK (by 53% to 47%) if another referendum on the issue were to be held. Perhaps they’ve decided that, with the oil price now less than half the $100 p/b seen around the time of the last referendum, the prospect of independence doesn’t look quite as attractive as it once did.

All of which is of academic importance however, until the new UK Prime Minister triggers ‘Article 50’ with our European neighbours, to formally begin the Brexit process. Until then, we expect further bouts of volatility, centred around the UK and Europe, but also extending, at times, to global markets.

We therefore remain relatively cautious in our short-term outlook but remain confident that holding a portfolio of diversified global assets, across the different asset classes will hold you in good stead over the longer-term.

 

Brexit - Aftershock or Not?

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