As is very obvious from today’s movements in financial markets, the result of yesterday’s in/out EU referendum in the UK has come as something of a shock to most investors, ourselves included!
In addition to the Pound’s sizeable decline on the foreign exchanges – reported as being its largest daily move ever – sharp sell-offs across the UK equity market, strong demand for gilts and a spike in volatility indicators are all predictable responses to a UK-centric “risk-off” event. This has, of course, been replicated in other markets, as investors have retreated to the sidelines. In fact, European equity markets have, at the time of writing, fallen further than the UK’s in nominal terms. While this is in part currency-related – the Pound’s weakness is a boon for a UK equity index dominated by export earners – it also reflects a view (which we share) that the impact of the vote is likely more damaging for the EU than Britain, from a political perspective, in the long term (that said, another Scottish referendum is almost certainly on the way!).
Source: Express.co.uk
Importantly, although our expectation was for a vote in favour of “Bremain”, we had positioned our portfolios very cautiously over recent months. Indeed, within our US Dollar models, the combined exposure to UK and European risk assets is broadly in line with global benchmarks and therefore relatively modest, while our Sterling and Euro portfolios will benefit, in relative terms, from having significant non-domestic exposure.
From an asset allocation perspective, meanwhile, our shift towards a more defensive strategy earlier this year (by reducing equity and listed property in favour of long/ short equity, hedge funds, gold bullion and cash), is looking like a good move at this point in time.
Rather than being forced into panic measures (unlike many market participants, it would seem), we are thus in a fortunate position to take a measured view of the immediate and future consequences of the UK’s eventual departure from the EU, which, it’s worth remembering, will take at least two years. As such, we are focusing on the opportunities that the short-term market disruption has uncovered with a view to profiting from them over the longer term.
Post UK Brexit Vote - Market Update
