The UK woke up on Friday morning to a vote to leave the EU, the Prime Minister is set to leave office in October and the markets are suffering a bout of jitters. We all knew that these were possibilities. To some this is a good day, to others it is not. But we are where we are and we need to look forward to where we go from here.
We should not, however, lose sight of the fact that what we have witnessed is a long-standing, robust and stable democracy at work with both sides attempting to sway voters with the power of argument, passion and belief. Although we have seen some dubious use of facts and figures, some scaremongering on both sides and some less than savoury comments at the fringes, this process has been free of violence, open to all and with everyone’s vote holding the same sway; that we should be both proud of and reassured by.
We are also seeing the markets at work, trying to make sense of what this all means and reflecting the aggregate view in market prices. We are likely to see market gyrations over the coming weeks and months, but we should all remember to view it as short-term noise. There are many ‘known unknowns’ as Donald Rumsfeld would say: we face an uncertain and likely tough negotiation to exit the EU, with unknown outcomes; an increased likelihood of another Scottish referendum and threat to the Union; and the knowledge that broad change is upon us.
As individual’s we need to try not to worry about things that we can’t control, such as what will happen to the UK economy over the next five years, or where the markets go in the next few days, weeks and months. We should focus on things that we can control such as the structure of our investment portfolios. As we have explained before, your portfolio is well positioned to weather this storm, both in its structure and the high quality funds that we recommended to execute your portfolio strategy with. To reiterate:
Your portfolio is global diversified in terms of its equity exposure
It is worth remembering that the UK economy represents less than 5% of global GDP, and its equity market is around 6% of global market capitalisation. The stock market is also not a direct proxy for the UK economy as many of its constituents have considerable overseas operations, such as HSBC and Shell. In fact, around 70% of earnings from FTSE 100 companies come from overseas.
Your portfolio has well-diversified exposure to other developed equity markets and emerging markets economies and companies, which will help to mitigate any UK-specific market fall. Equity markets as a whole might be volatile, but that is the nature of equity investing, and being diversified will help.
A fall in Sterling is actually beneficial to portfolio performance For Sterling Based Investors
Friday morning saw a big fall in Sterling against the US dollar and the Euro. Ironically, this fall is beneficial to your portfolio if it is denominated in Sterling as the non-Sterling denominated overseas assets that you own are now worth more in Sterling terms. That is an example of good diversification in action.
Owning short-dated, high quality global bonds delivers strong defensive qualities
The primary defensive assets in your portfolio are short-dated, high quality bonds, diversified on a global basis. At times of market uncertainty, money tends to flood from more risky assets (equities and low quality bonds) into high quality bonds, driving yields down and prices up. We have already seen early signs of this happening in the major bond markets this morning.
Have faith in your portfolios and resist the urge to look at its value too often. You don’t need this money today or tomorrow, so try not to worry about any short-term falls; that is the nature of investing. This is a long-term strategy to meet your long-term goals.
After last night’s dramatic result our advice is as before – Keep Calm and Carry On. Whilst markets have reacted savagely to the Leave vote, overreactions are not uncommon. The best advice at the moment is to remain calm with one’s investments and look for opportunities to rebalance portfolios as they arise. As ever for any concerns you might have please call either Richard or Nils-Odd.