After weeks of frantic campaigning, the UK has voted to leave the European Union. Should the government consent to act on this result, the political ramifications will be significant. However, as yet there is little certainty over how Britain’s 43-year membership of the European community will be unwound. The UK and the EU must now embark on a period of transition in which the terms of the UK’s exit must be negotiated. There can be little certainty over the outcome of these negotiations.
The initial market reaction to the result has been starkly negative. As the referendum verdict became clear, sterling sank to levels not seen since 1985 while the futures market priced in a fall of between 7% and 10% for the FTSE 100 index of UK equities.
The impact of the vote was also felt overseas, with Japan’s Nikkei 225 index falling close to 8% as the yen – a traditional ‘safe haven’ asset – surged. Prior to market opening, futures markets priced in expected falls in excess of 5% for the US equity market and 10% for German and French equity indices. Meanwhile, with risk aversion rising sharply, the yield on the benchmark 10-year gilt (which moves inversely to the bond’s price) has fallen to an all-time low just above 1%. Meanwhile yields on US Treasuries and German have fallen to multi-year lows.
The equity market losses will, in the short-term at least, impact on portfolio returns. For investors in the Graphene Portfolios, however, these losses will have been offset to a degree by allocations to high quality bonds and exposure to foreign currencies.
Though the initial market reaction has been pronounced, investors should strive to remain focused on the longer-term. As the details of the negotiations which will determine the long-term outlook become clear, Omnis – and the managers of the Omnis funds – will continue to monitor markets closely and keep advisers and investors informed of the relevant developments.