Notes to clients following the Brexit Referendum result, 27th June 2016


Are we worried about BREXIT? No we are not and neither should our clients be.

Let us remind ourselves of what remains the same following the “leave vote”;

European Economic growth has been sluggish and world economic growth has been slowing, whilst the US and the UK have been relatively robust. In light of these factors we positioned client portfolios long ago to reflect this; well before we even knew that there would be a Referendum!

As we have stated before in our Market Reviews:

  • We do not invest in Europe, or the European project, but in some truly first class international companies that happen to be headquartered in Europe.
  • We invest globally in companies that currently have such strong cash flows that they are likely to remain capable of growing your dividend income over the long term, so that if capital growth is slow, or even negative in the short term, you should be rewarded with a reasonable level of income during any periods of volatility.
  • Market volatility often throws up opportunities for our Fund Managers to buy excellent stocks that have previously looked too expensive, but have now come into buying range after being indiscriminately marked down in price.
  • We invest in companies who can show sufficient cash flows to reinvest into their own businesses thus creating future shareholder value in the form of higher share prices and higher dividends, and more often than not, a combination of both.
  • We spread investments widely in terms of geographical location, industrial segments, and in asset classes such as Fixed Interest, Property, Equities and so on. We also diversify by investing with a wide range of Fund Managers.

So, what of BREXIT?

There are many reasons for the vote to come out of the European Union and a myriad of interpretations, none of which will help us in our decision making.

One major view is that, on the whole, people did not believe the politicians, company chairmen, economists and others of the “Ruling Elite” and the more they tried to persuade people to “Vote In”, the more the public were exasperated and determined to stage an uprising.

Whatever the reasons, in the end this Ruling Elite will ultimately set the framework within which business is carried out. Germany and France both have elections coming up and their leaders are surely not going to recommend some sort of revenge attack against the UK, which would alienate their own business class who have extensive embedded interests in dealing with UK businesses.

Over time, some sort of accommodation will occur and if the terms of trade with Europe end up being slightly worse than currently, this will stimulate businesses to further expand their trade with other areas of the world such as the Far East, Latin America, India, the USA and other countries.

The Far East and Emerging Economies, as well as the US are still going to be some of the fastest growing areas when the global slowdown reverses and we want our clients to be part of this growth, not feeling locked into a relatively slow growth economic zone that is plagued with bureaucracy and a political project that is now on very shaky ground.

For all we know, the UK exit might just give the Brussels elite the warning that is needed to reform, before others go down the same road as the UK.

As for the currency, although the fall in value has been fairly marked, it is a double edged sword. Whilst it obviously affects holiday makers and importers of foreign goods, it gives an excellent opportunity to our exporters, whose goods are now far more competitive. A number of economists and Fund Managers and even our own clients, have long said that Sterling has been quite overvalued and although this is hardly a controlled depreciation, nevertheless it may well be of benefit overall.

What do some of of the Fund Managers we most respect have to say?

Premier Asset Management: “The fallout from the referendum result is going to cause a considerable amount of volatility, at least over the short term. Bur despite this, the sun will rise, companies will still trade and consumers will still spend.  We believe that the short term volatility unleashed by the referendum will ultimately create opportunities for our funds to take advantage of.”

Schroders Unit Trusts Limited: “We looked at the FTSE All – Share Index, the broadest measure of the UK stockmarket, over the past twenty-five years. We then filtered the data to show the 20 greatest one day falls and looked at what happened over the days and years that followed. On the worst day, in the depths of the financial crisis on 10 October 2008, investors lost 8.3%. However, one year later the index surged and investors made 26%, including income paid through dividends. After three years the total return was 41% and after five years was 87%.” (See more information here.)

Similar figures were evident following other major upheavals, such as the World Trade Centre attack.

Our view is that if the market had already been very overvalued, the falls we have seen would have been far worse and the current fall so far has only taken us back to where we were a few months ago. Certainly, any froth in particular stocks has been dispersed.

George Osborne made a speech early on the morning of 27th June designed to reassure the public, companies and investors that all the support that was needed would be in place whilst we negotiate the next few months.

For the moment, we have to leave it to the politicians to sort things out, both in the UK and Europe, whilst businesses carry on doing what they do best; making money for you and paying dividends to help support your lifestyle. In so as far as we are concerned, it is business as usual and, on balance, we are comfortable with the mix of investments that we are holding for clients.

If you have any questions or comments regarding the UK exit from the European Union, please do not hesitate to give Stephen Hall, our Investment Manager a call.