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5th July 2016
Market Commentary July 2016

London news

“A week is a long time in politics…”

History students will look back and study the EU referendum and the subsequent reverberations as one of the most momentous peacetime periods in both economic and political terms.

World markets, financial institutions, even bookmakers were convinced that “Remain” would win – the arguments were merely concerning the margin of victory. Even Nigel Farage (now a former politician) had conceded defeat as the polls closed on 23 June.

As we now know, the following morning unveiled a different picture and one with quite a clear majority in the “Leave” camp. The market then rushed to understand the consequences of this shocking and unwelcome result. Early indications showed 8% falls on equity markets and sterling 10% down against the dollar. Just as a reminder, in the harrowing days of 1992 and the ERM crisis, sterling fell by approximately 4.5%.

The day progressed and we saw the start of a twin track market. Overseas (particularly dollar) earners became sought after for their growth and stability, and even on the same day the overall market fall was contained to circa 3%. The focus also then fell upon UK-centric, domestic companies which were now at the mercy of an economy that economists agreed would slow down – the extent to which is still being debated. Within two days, many sectors including banks, house-builders, retail and travel had all registered double digit falls that even extended beyond 25% for certain companies. Two weeks on, and 85% of the gain in the top 100 UK companies has come from only about 20 companies (mainly oil, tobacco, pharmaceuticals, mining and international consumer) which have all increased in value, helped by the earnings upgrade afforded by the sterling weakness and dollar strength. The twin track market continues with investors still taking fright from domestically focussed businesses; and daily downgrades have become the norm.

Politically, the last fortnight has been just as dramatic. Political leaders racing to resign (or not) has been a regular feature and all this has created a vacuum to fuel the falls of uncertainty seen in UK PLCs. Following the referendum result, the country and markets needed strong leadership, clarity of thought, and a plan to make the best of whatever the result would bring. There is a Bonnie Tyler song “Holding out for a hero” and if ever there was a time for a unifying leader it is now. Instead, another of Bonnie's lyrics is unfortunately more applicable to current political parties: “Every now and then we fall apart”.

The market needs leadership and direction and Mark Carney is trying to deliver what he can from his own office at the Bank of England, relaxing some of the banks' restrictions to release capital and talking of lowering interest rates. However, a unifying Conservative leader is required to take control and we sincerely hope Theresa May becomes Theresa “Will”.

Whilst some UK markets have suffered it should also be borne in mind that, since the vote, so have European markets. The impact of the fifth largest economy leaving is still being evaluated and – as we saw with Greece some years ago – it would be extremely counterproductive to the EU if the UK were seen to stabilise and benefit from its departure. The rise of anti-EU and anti-establishment feeling is not just a UK phenomenon but gaining widespread support in many European countries. With 28 –  sorry: soon to be 27 – member states, we are never too far away from an election; and each will be followed closely and with increasing scrutiny, because having lost faith in politicians and economists we are also now losing faith in polls. There will inevitably be more shocks to come.

Looking slightly forward, we remain in choppy and somewhat uncharted waters. It is easy just to focus on Brexit and its consequences; but elsewhere we are also seeing global growth slowing, increasing concerns regarding Chinese growth and debt, and central banks unable to stimulate anything other than asset price bubbles. For investment managers, diversification of geographies and asset classes is always important and particularly so at the present time. The UK-focussed and dependent market has fallen significantly since the vote; however, there will be a time to buy well-managed, financially strong companies that will deliver safe and growing dividends over the longer term. Having strong, determined leadership from a new Prime Minister and unified Cabinet could well be the start of this process.