A domestic recession and the potential for global contagion have been pinpointed as the most significant consequences of the UK’s historic decision to leave the European Union.
With a vote to exit having been all but priced out by financial markets come Thursday, Friday’s opening saw stocks plummet, with gilt yields and sterling hitting record lows.
Reassurances by Bank of England governor Mark Carney then soothed nerves, but the week ended with investors acknowledging a “structural break in [the UK’s] economic and political models”.
Dominic Rossi, chief investment officer at Fidelity International, said: “The break in the political model is going to be more profound than the break in the economic model.”
Nonetheless, Mr Rossi described a recession as “unavoidable”, and said the decision “leaves business leaders and investors in a period of unprecedented uncertainty for the UK”.
The prolonged uncertainty may also be driven by political drama following Prime Minister David Cameron’s resignation.
Political mayhem could spread to other EU nations, and lead to a “severe global market correction”, warned Hermes chief executive Saker Nusseibeh.
Alternative views came from Neil Woodford and Schroders’ Azad Zangana, both of whom suggested two consecutive quarters of economic contraction were not their base case. But their view was at odds with most of the industry.
This morning (June 27), the Chancellor George Osborne shleved plans for an ‘emergency budget’ including tax rises and spending cuts. Mr Osborne said new figures from the Office of Budget Responsibility would be needed.
While attempting to calm markets, the Chancellor did not say the UK could avoid a recession. He said companies freezing investment plans would impact public finances and the wider economy.
Richard Buxton, chief executive and head of UK equities at Old Mutual Global Investors, said that a recession was likely.
“We believe that the prospects for domestically focused UK businesses are clearly the bleakest,” Mr Buxton said.
“FTSE multinationals will almost certainly perform better [due to] the weaker pound.
“Investors should now brace themselves for an unpleasant period of relatively indiscriminate selling.
“There also seems to be a real possibility [this] could contribute to tipping the US economy into recession,” he added.
Christopher Jeffery, a strategist at Legal & General Investment Management, said: “On the back of this recession, expectations for interest rate hikes are firmly off the table.
“We do not expect interest rates to drop below zero, as in Europe, but a small cut in policy rates and additional quantitative easing are a likely policy response.”
Eyes turned to which asset classes could protect investors. Unsurprisingly, in the wake of the result, 10-year gilt yields fell by 36 basis points to a record low of 1.01 per cent.
But Mr Rossi implied this state of affairs may not last for long. He said the UK’s current account deficit, which stood at 5.2 per cent of GDP last year, would now come into focus.
This means gilt yields could begin rising, adding to the complications for a country already facing an uncertain future.
