The vote is in and by a decisive margin (52% v 48%, 17.4m v 16.1m) the UK has decided to leave the EU.
Both the margin of victory and the high turnout of 72% make an implementation of this decision a certainty.
For financial markets this decision raises more questions than it answers, adding a significant element of risk to the UK and also to our neighbours at a time when global growth is fragile.
Aside from an unquantifiable hit to UK growth as businesses re-assess their capital expenditure plans, the UK is now in political limbo. The Prime Minister has indicated he will step down ahead of the Conservative party conference in October, leaving his successor to trigger “Article 50” – the beginning of the untried two year leaving process. Adding to the confusion, the Scottish Nationalists have already given a strong indication that the result opens the door to another Scottish referendum on the basis that Scotland voted overwhelmingly to Remain.
Investors are now in uncharted waters but we must attempt some assessment of the potential damage: The consensus of the economic impact varies by region. For the UK there is expected to be an immediate cessation of growth as business investment dries up – at least for the balance of the year. This may be compounded by an Austerity budget, if the run on the pound is accompanied by falling Gilt prices (happily not the case as we write this). Next year is hard to call, but a 1% hit to growth is a conservative estimate. In Europe, the extent of the growth hit will depend upon the hit to fragile confidence and the efficacy of the ECBs efforts to supply liquidity as needed. America will also be vulnerable to a shudder in confidence, but this is expected to pass quickly as local politics will dominate the headlines and emotions. It does however provide an excuse for the Federal Reserve to hold-off interest rate increases for the rest of the year. Emerging Markets are a hard call, with a sharp rally in the Dollar presenting the major risk to their nascent recoveries. It is reassuring that the Yuan/$ rate is only off 0.5% – since this presents some “firebreak” to a stronger Dollar.
Looking at Equities in local currency terms the UK is down by around 5% at the open, but other similar moves in overseas stock markets have been moderated for UK investors by the sharp fall in sterling, so that Far Eastern and American shares may even show gains when translated into pounds.
What Happens Now?
We have already seen statements from key central bankers in Japan & Europe & Mark Carney in the UK that they have adequate measures to support markets in place. This should allay any immediate fears of contagion from financial markets into the banking system. The fears of political contagion will be less easy to address, but nevertheless, expect a round of high level meetings and political pronouncements from European leaders underlining their commitment and conviction in the European Project. The measure of their combined success in convincing investors that this is a shock that can be absorbed quickly will be seen over the coming days & weeks. We are watching currencies, bond yields and peripheral spreads more closely than shares for clues.
This review has been issued by Investec Click & Invest Limited based on information from the Research Team of Investec Wealth & Investment Limited on the basis of publicly available information, internally developed opinions and other sources believed to be reliable. All views and recommendations expressed are based entirely on such data. Our material is regarded as non-independent research and a marketing communication which means that it has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.