InvestmentsJun 24 2016

Recession risk and QE as UK votes to leave EU

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Recession risk and QE as UK votes to leave EU

Managers and fund houses have warned over “significant volatility” and contagion in the wake of the UK’s decision to leave the European Union.

As the UK electorate’s decision to vote to leave the European Union became clear, sterling began falling and has now hit a 30-year low against the dollar. The FTSE 100 has slumped close to 8 per cent.

Banking stocks have taken a significant hammering with Royal Bank of Scotland and HSBC both down 21 per cent and Barclays 44 per cent.

Richard Buxton, chief executive of Old Mutual Global Investors, predicted the UK’s vote to leave the EU could tip the US economy into recession, as well as its own, and prompt the Bank of England (BoE) to start another round of quantitative easing (QE).

He said it was reasonable to assume “the UK will quickly enter a period of economic recession” and also warned “investors should now brace themselves for an unpleasant period of relatively indiscriminate selling as funds aim to meet redemptions in conditions where liquidity may be more limited than usual”.

He explained: “In terms of international markets, there seems to be a real possibility that the result could contribute to tipping the US economy into recession.”

Turning to the BoE’s actions, Mr Buxton said it may “quickly cut interest rates”.

“Restarting the programme of quantitative easing – a feature that has been absent from the economic landscape for some three years now – also looks a possibility. At the very least, the central bank is likely to indicate its preparedness to take such action,” the manager added.

The manager had predicted the vote would be close but ultimately thought the “status quo would prevail”.

The Investment Association, however, has called for calm and said it was important investors “adopt a collective long-term focus”. The trade body said it would work with government to ensure the asset management industry’s position in Europe was protected.

It said the rules of asset management operation remained unchanged and client protections that were put in place would stand firm.

“The focus in the short term will be on how markets respond. It is important that we adopt a collective long-term focus.

“How the UK’s role in the EU will change will become clearer over time, but there are likely to be challenges ahead and we look forward to helping the Government and our industry to navigate these.”

Fidelity multi-asset portfolio manager Kevin O’Nolan said investors would know more by the weekend on the extent of the BoE’s plans.

He said: “Central bank action is likely, but the timing of this is uncertain. While we may see intervention today, it’s also possible that the major world central banks will meet over the weekend and discuss coordinated moves to be announced on Sunday.”