News - Published 24th June 2016

Investment Commentary: The EU Referendum – the worst of two outcomes

Depending on your personal point of view you may or may not agree with the statement above. I should take care therefore to explain that I refer of course to the impact of the referendum result upon Investment Markets.

Although a close result was long expected, by the close of business yesterday the City seemed confident of a victory for the “remain” campaign. This confidence seemed well grounded in the recently improved market sentiment (not to mention, shifting betting odds). As late as yesterday evening, Nigel Farage appeared to be positioning himself for defeat, only to subsequently be celebrating victory early this morning. As I have said several times before, investment Markets do not like “bad news” but they positively hate a “bad surprise.” A point that is perhaps underlined by the steep decline in the value of sterling, together with the scale of overnight losses in Asian Markets and the sharp sell-offs in UK Equity Markets early this morning.

Such is the extent to which investment markets hate bad surprises, that sometimes they can overreact. So it seems with the FTSE 100 which has subsequently recovered some of its initial losses in early trading this morning. Part of the reason for this is that the majority (70%+) of the returns from the constituent companies of the FTSE 100 are derived from oversees. Accordingly those companies are both less exposed to the domestic UK economy and stand to benefit, to some extent, from the fall in the value of sterling.

However certain sectors of the FTSE 100 such as Home Builders and Financial Services have fared less well. Although homebuilders have recovered from the extremities of market opening, as I write this note, Taylor Wimpey, the biggest loser on the FTSE 100, is down nearly 28%. Similarly large banks such as Barclays & Lloyds have struggled, with Lloyds currently down some 20%. Furthermore, the FTSE 250, which perhaps represents a truer reflection of “UK PLC,” has fared noticeably less well than the FTSE 100, owing to its more domestically orientated constituent companies.

I have prepared a more detailed investment briefing note which you can view here.

Overreaction or not today, I should emphasise that markets dislike uncertainty. It is difficult to describe the result of the referendum as anything other than a bad outcome for investors, at least in the short to medium term. Longer term it is harder to know whether the outcome will be good or bad for Investors as there is no precedent for a country the size of the United Kingdom leaving the European Union. Indeed with the “winners” seemingly in no rush to invoke “article 50” one can only assume that the uncertainty will continue for some time to come.

Whilst the EU referendum is a salient reminder of the risks of investing, this morning’s “overreaction” is also a useful lesson in how investment markets work, or perhaps don’t work. It is important to take some time to assess your personal position and whether anything has fundamentally changed. For example how you feel about risk. It is important that you only take investment risk that you feel comfortable with and that you have the capacity ability to tolerate loss. We invest monies with a long term outlook, in support of long term goals & objectives such as saving for retirement. We think the sensible approach when investing is to spread your wealth across a diversified range of asset classes and geographic sectors.

If you are concerned about the impact of the EU Referendum Result upon your Investment Portfolio, please do not hesitate to get in contact with your Financial Planner.

Read Menzies full response to the UK electorate’s decision to leave the European Union.

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Menzies Wealth Management Ltd is authorised and regulated by the Financial Conduct Authority. FRN: 486548.

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