The decision last week to leave the European Union following the UK’s referendum, sent shockwaves in parts of the country and panic on the financial markets.
In early trading, the FTSE 100 fell by 8.7 per cent on Friday, before closing 3 per cent down, and lost another 2 per cent on Monday, finishing below 6000. European stock markets fell by the same order.
Meanwhile, sterling fell to a 30 year low against the dollar, falling 14 per cent over two days, and government bond yields fell dramatically, as investors tried to find a safe haven for their money.
Likewise, the price of gold shot up to $1,358 per troy ounce on Friday, as it had already been considered a place of safety when other stocks are not doing so well.
Clearly the decision has had a dramatic impact: Legal & General Investment Management forecasted a recession for the second half of 2016, for the UK, and others followed suit.
Eric Chaney, head of research at fund manager Axa IM, said: “We expect a significant slowdown in the UK, starting to materialise in Q3 or Q4, a recession being a possibility.
“While the depreciation of the pound may give some relief to exporters’ margins, the combined confidence and inflation factors will hit real domestic demand even harder: consumers’ real income will be hit and corporate investment plans are likely to be postponed until the negotiation dust settles.”
For now, the Bank of England governor, Mark Carney, has said he: “Will not hesitate to take additional measures as markets adjust”, having put in place contingency plans for such an eventuality. His comments were echoed by the ECB.
So what are the prospects for UK investors and pension policyholders?
Investment experts are surprisingly sanguine over the change, impressing on clients the need for calm, considered reflection on their portfolios, rather than panic.
Gavin Haynes, managing director of Whitechurch Securities, said: “When markets are panicking, selling your investments and making changes to your investment strategy is not a sensible option.
“The referendum result is a significant change to the political and economic backdrop, and it’s a massive shock, but when investing in large caps, they tend to be global businesses, and therefore, the backdrop on the global scale, we don’t believe has fundamentally changed.
“There’s going to be a period of risk aversion and a lot of volatility. We always stress people should have a diversified portfolio. That should include cautious assets, which should help when there’s risk in one area.”
The stocks that performed badly in the day of the referendum result included housebuilders – hit by a fear of a lack of confidence – and financials, as there is a real fear that London may lose its status as a financial centre.
Stocks that held their own were those with an international outlook – GlaxoSmithKline rose nearly 4 per cent in value while Rolls-Royce, another business with an international client book, saw its share price rise 3.57 per cent.
Mr Haynes said: “At the moment we haven’t changed our weighting in UK equities, and with sterling weakening, that makes them more competitive. We don’t think the competitiveness of a lot of companies will change fundamentally.”
Laith Khalaf, senior analyst at Hargreaves Lansdown, agreed, saying: “If you’re invested in the market then you’re still holding for the long term and it makes sense to stay put. The other alternative is to cash in, as there may be further falls in the stock market.
“But what you’re doing is that you’re giving yourself a decision about when to buy back in.
“You need to take a valuation-based approach to looking at the markets; our analysis suggests that UK equities are in the middle of the range, historically speaking.” Indeed, he added that current falls represent a buying opportunity.
There are bigger problems on fixed income, however, as investors move to ‘safer’ assets, and prices have gone through the roof.
Mr Khalaf said: “Gilt yields have fallen to record lows, and you’re looking at an even smaller yield from investing in bonds over the long term. If you’re very risk averse, there’s not a huge amount of yield, and there’s a fair amount of capital risk. There’s still very little in the way of returns from government bonds.”
Falling gilt yields – 10-year gilts sank below 1 per cent on Monday – are likely to have an impact on the costs of annuities. David Trenner, technical director of Intelligent Pensions, said: “Where it’s going to be a problem is where people are buying annuities, because obviously if gilt yields fall, annuity income will fall; if you have to buy an annuity in the short term, because you’re retiring, that’s obviously bad news.”
However, those in a defined benefit scheme could see a rise in transfer value, as trustees calculate that they need to make a bigger provision to achieve the same level of income as before the referendum.
Other challenges for pensioners are those in drawdown. Mr Trenner said: “People who are over 55 and self-advised are at great risk of crystallising losses. You need to have a process in place for clients drawing income, because they are going to be drawing income from a fund that has just dropped in value.”
Longer-term, there may be challenges in the shape of the financial industry that serves UK consumers. Much of financial services is affected by EU legislation, not least the passporting regime that allows fund managers and others to sell their products around Europe.
Vincent Keavney, finance partner at law firm DLA Piper said: “Our entire regulatory framework is tied up with EU regulatory framework. Our UK financial services is based on EU passporting.”
For UK funds to continue selling into Europe, once the UK is outside the EU, the UK has to show it is offering an “equivalent” regime.
Mr Keavney said: “In the short-term, we could trade on the basis of equivalence. The question is, do we remain equivalent, and the EU could find three or five years down the line that there are some regulatory changes here that the EU doesn’t like.”
Either way, whether one thinks the volatility will be short-term or long term, the financials are unlikely to be the same for a considerable amount of time.
Melanie Tringham is features editor at Financial Adviser
| Key Points |
The UK decision to leave the EU last week sent shockwaves through financial markets. Investment experts are telling investors to remain calm. Those in income drawdown policies need to be mindful of stock market volatility. |
