Initial Thoughts on the Vote to Leave the UK


The result of the EU referendum was a huge surprise to me but the initial market reaction certainly was not. Sterling has fallen especially against the dollar whilst the FTSE 100 stock market initially plunged 8.5% but has reversed some of these losses. As I write at 10.06 a.m. the index is down 5.19%. As investors we know markets hate uncertainty and I expect volatility to continue for the next few weeks and months at least.

It is important to recognise not all the consequences of market falls are negative. So let’s consider a falling pound. Yes it makes imports and foreign holidays more expensive but there potential benefits. Exports become cheaper whilst the economy would benefit from modest inflation. Further around 65-70% of FTSE 100 company earnings are from overseas and therefore large companies and mega-caps are less dependent on the state of the UK economy compared to FTSE 250 and UK smaller companies. In addition if a company has earnings in overseas currencies such as dollars, euros and yen on redemption back to the UK and conversion to Sterling there is a currency boost. This should support dividends. Finally UK assets become cheaper for foreign investors and whilst there will be concerns about investing in the UK given the economic certainty, merger and acquisition (M&A) activity could be boosted by attractive valuations of UK companies.

You have no doubt listened to competing voices and experts on the UK economy throughout the referendum debate. Today I want to refer to two. The first Mark Carney, Governor of the Bank of England said today that the banking system in the UK is much better capitalised compared to the financial crash in 2008. I have not encountered anyone who believes we are witnessing the start of another global financial crisis on par with that which followed the collapse of Lehman Brothers. That was caused by too much leverage or debt in the banking system. Today’s events are geo-political with terms of global trade at stake.

Secondly this morning I read a blog post by Neil Woodford, founder of Woodford Capital. He is rightly recognised as arguably the best UK equity fund manager. His firm commissioned an independent report from Capital Economics to examine the implications of the UK leaving the EU. The conclusion of the report was that in the long-term the effect on the British economy would be largely unaffected. Woodford himself subscribes to this view. He is a long-term investor and believes that fundamentals ultimately will determine the movement of  equity prices. He does not buy the market, he buys strong companies with robust cash flows that can grow earnings, at attractive valuations. He backs his convictions and avoids short term noise on the belief that if a company has strong fundamentals it will deliver solid returns for investors. That is my opinion too. However with the potential for fast moving and unpredictable turns of events this is unlikely to be my last blog post on the subject of Brexit.

This blog post reflects my views and interpretation of third party commentators on the UK economy and the vote to leave the EU. Nothing in this article should be construed as investment advice. You should seek advice before making investment decisions.