So – we’re out. The referendum on the European Union was hard fought but the result was clear – Brexit – the UK is parting company with the European Union.
Whichever way you voted, you would probably have to agree that certainty one way or the other must be preferable to the doubts we have been living with.
But now the dire warnings, exaggerations and scare stories we have been hearing from both sides over the last few months have evaporated, what are the new economic realities in the post referendum world?
What kind of post Brexit investment strategy should you be looking at now?
Not everything will change overnight.
The terms of the exit will need to be agreed, a process which will take years, and while the details are thrashed out, it will be business as usual in many areas.
However, there will be an impact, and it could hit the stock market quite fast. It’s performance of the has been held back by the uncertainty, especially in sectors, such as financial services, some housebuilders and consumer retail, while customers were waiting to know which way the world was going.
So some of the impact of Brexit has already been factored in, with Europe-exposed FTSE 100 and FTSE 250 companies already underperforming the market by 5% and 4% respectively. However, there may be more falls to come.
The FTSE 100 looks set to fall today and over the next 12 months.
The FTSE 250 could be affected to an even greater extent, given that the mid-cap index generates 50% of sales in the UK, compared with just 25% for FTSE 100 sales. The index has already underperformed the FTSE 100 this year.
Some commentators are predicting more modest growth, while others are predicting a recession. The truth remains to be seen.
What about the Pound?
The performance of the pound is causing a lot of excitement right now.
Coming out will probably mean a sharp fall in its value against other currencies, which will have the effect of boosting the competitiveness of British exports. A weaker pound means exporting companies could enjoy a boom, despite the fact that free trade across Europe is now looking less likely.
So, if you are thinking about investing in companies which have exports at the heart of their business, you may want to remember that staying in Europe is not the whole story. They could find themselves more competitive over the coming months, despite the threat of being subject to increased trade tariffs hanging over them.
UK-exposed and cyclical sectors, banks, insurance, listed REITS, homebuilders, general retail and leisure are the types of domestic sectors which may be expected to lose out as we part company with our European friends.
If coming out means a downturn, commercial property will be affected.
The London commercial real estate sector is particularly sensitive. Uncertainty surrounding future demand has already put a brake on London office space, with a fear of a decline in rents and thus capital values. The listed real estate sector owns 12% of the UK‘s commercial real estate market and about 60% of their assets are in the London market, making the outlook for them particularly unappealing.
House prices may also be expected to be affected. Falls may be unlikely, but the price boom in London and the south may be over.
Interest Rate Rises
With the uncertainty of the EU referendum out of the way, will the Bank of England raise interest rates? The answer is probably not at least in the near future. Worries about the UK economy and GDP in the new world make it unlikely. The Bank has long been clear that it is a rise in inflation that they are really interested in – the threat of that seems to have receded, and it is probably safe to predict that an interest rate rise has been postponed.
Making your investment decisions
So what’s the verdict on going it alone?
Although the outlook for the economy may have been made even harder to call by the decision – it has to be remembered that not all the problems affecting the UK or global recovery have hinged on the UK being part of the EU.
There are certainly some new uncertainties ahead, but you should recognise that where there are uncertainties, there may be opportunities too. If you take the view that it is time to look again at what equity investment can offer, it makes sense to have an expert who can look with you.
The value of investments can go down as well as up and you may not get back the amount invested.