Investments  

Shock to the system

This article is part of
What next for the UK? - July 2016

Shock to the system

There was no shortage of reaction from fund houses following the news on June 24 that the UK had voted in favour of leaving the EU with a 51.9 per cent majority. A day earlier, markets had all but priced in a vote to remain.

Matthew Beesley, head of global equities at Henderson Global Investors, said “the investor shock today [June 24] will be hard to digest. We estimate markets were pricing in around only a 20 per cent chance of leave”.

Shortly after, prime minister David Cameron announced he would be standing down and his replacement would be decided over the summer. They will be responsible for triggering Article 50 of the Lisbon Treaty, at which point the UK will have two years in which to exit the EU. Bank of England (BoE) governor Mark Carney was quick to reassure the country that “we’ve taken all the necessary steps to prepare for today’s events”.

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He reminded investors that compared to the financial crisis of 2007-08 the “core of the financial system is well capitalised, liquid and strong”.

But following the FTSE 100’s 8 per cent slump on opening, many industry figures began warning the UK will now enter a recession, despite markets later regaining ground.

Richard Buxton, head of UK equities and chief executive of Old Mutual Global Investors, 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”.

REACTIONS

The Wealth Management Association says:

“It is important there is a focus on long-term investment, ensuring the continued success and stability of the UK’s £734bn wealth management community.”

The Financial Conduct Authority states:

“Much UK financial regulation derives from EU legislation. This will remain applicable until any changes are made, which will be a matter for government. Firms must abide by their obligations under UK law, including those derived from EU law. The longer term impacts of the decision on the UK’s overall regulatory framework will depend, in part, on the relationship the UK seeks with the EU.”

He predicted this could spread further afield to other markets, including the US. “There seems to be a real possibility that the result could contribute to tipping the US economy into recession,” he adds.

Mr Buxton suggests the BoE “may quickly cut interest rates” and restart its programme of quantitative easing, “a feature that has been absent from the economic landscape for three years now”.

Ian Kernohan, economist at Royal London Asset Management, also sees a recession on the horizon in the wake of a vote to leave. He remarks: “Given the sharp rise in uncertainty for households and firms, it now seems sensible to assume a UK recession in the second half of this year, with spending decisions postponed until the situation becomes clearer.

“The longer term impact on economic activity depends on the new trading arrangements the UK must now negotiate with the EU and the rest of the world.”