Brexit: view from Edinburgh wealth managers Psigma
Simon Kay of Edinburgh-based wealth managers Psigma, gives his reaction to the shock Brexit result.
After an historic vote yesterday over our country’s future within the European Union, the UK electorate has voted to ‘leave’. It was a tight race, with a great deal of regional bias, but the ultimate result that was confirmed shortly after 06.00 is for a ‘Brexit’.
Our view through the whole process was that to be in any way scientific or precise about the result was impossible given the lack of historical precedents. However, we expected that the ‘Remain’ vote would gain traction as the voting day approached, as the short-term economic arguments for staying would cause sufficient concern for voters to opt for the status quo. This was a view shared by most commentators and, particularly after a strong showing this week, financial markets.
However, whilst suspecting a ‘Remain’ vote was more likely, we had deliberately positioned our portfolios to ensure that we could provide some protection against likely market movement following a ‘Leave’ vote. As this year has progressed, we have employed a number of strategy changes, resulting in an active period for our portfolios. This gives us confidence that we can protect against the worst of the market falls in the coming days and affords us the opportunity to deploy capital in assets which have become oversold. As is always the case, markets will probably react first and think later, so we will be patient in assessing the best opportunities that may become available.
From an overall strategy perspective, it is worth noting that we favour a global focus at Psigma and own a range of assets in international markets. After the significant falls in Sterling today, we would expect those investments to help protect portfolios. In addition, we have added specific investments through the year so far to provide further protection in the case of a ‘Brexit’; we expect those investments to make positive returns today and also through a period of market uncertainty.
We have also reduced risk progressively through 2016. Particular noteworthy features are a move to being underweight in UK equities, in part because of the concern over ‘Brexit’, but also because we felt that they had become unattractive. We also reduced our exposure to European equities and European financial institutions, as we could not be sure about the ongoing future of Europe’s political system and the ability of regional companies to make profits. Finally, we have also recently lowered risk through reductions of higher risk corporate bonds, property shares, resources stocks and Emerging Markets equities.
While in the short term it is almost impossible to predict how badly markets will take this news, although based upon heavy falls in Asia this morning, it is likely to be a poor day in Europe, it is important that we immediately think about the medium-term future for markets and the global economy. Aside from the direct negative impact upon Europe and the UK, we feel that in time the UK’s departure from the EU will not be a game-changer for the global economy. Our expectation for low but positive growth remains in place so we will manage our asset allocations around that central view. It is also obvious that the global central banks will move quickly to assuage the collateral damage in global markets and notably the Bank of Japan is already threatening to take action. In addition, the chance of a second US interest rate hike any time soon is now surely off the table. It is vital that we respect the fact that while we view the UK as extremely important, we recognise that we are a mere pawn in the global chess game that is dominated by China and the US and economic conditions there will ultimately dictate the direction of both the global economy and financial markets.
Finally, it is important that we consider the outlook for the UK economy. Our view is that the UK economy was already in a difficult place, due to structural imbalances and low rates of investment. Sadly, yesterday’s vote will only weaken the economic outlook further. In addition, the political uncertainty over the Government, the Prime Minister and the plausibility of the Union will also weigh on our economy, currency and financial markets for some time to come. Of course, the decision to leave the EU will not destroy our country, but investors and businesses hate uncertainty and the obvious and easy fact to state after this historic vote is that the future for the UK is uncertain.
We will comment further after the weekend and after markets have had time to digest this unexpected result as well as the news that David Cameron has tendered his resignation.