Markets post-Brexit: who saw that coming?

On June 24th, the country voted to leave the EU. In the weeks following, we’ve seen petitions for a new referendum, David Cameron step down, Boris make a sharp exit, Gove try to sneak in the back door, May take up the mantle and Boris make his way back into the fold……keeping up?

Intriguing as it’s been, the political soap opera following Brexit thankfully seems to be settling down (though the Labour party still have a little melodrama of their own to resolve) and the country seems to be doing that very British thing of just getting on with it.

Informal exit negotiations are under way in earnest; this promises to be a long journey that will conclude with the UK taking its new seat at the global table without our European ‘besties’. How will we present ourselves? Will we get on with everyone? What should we wear? (ok, just me worried about that one…).

Only time will tell whether this new seat will turn out to be a bit wobbly or a strong platform from which the UK can truly express its value to the world.

So, how have markets fared during this period and how should we interpret this? Read on, you might be surprised….

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Initial Market Reaction

A Bremain result had been largely touted in the markets, so investors who’d taken positions on this basis were caught cold. The trading days immediately following Brexit saw Sterling significantly weaken and the FTSE100 Index fall approximately 6%.

Why was this? Fear, pure and simple. Would the country be able to retain and attract inward investment? How would this affect employment? What about our trade deals? Times like these raise more questions than answers and we know that markets struggle to cope with this type of uncertainty.

But then something strange happened. Between June 27th and today’s market opening, the FTSE100 has seen a rise of around 12% from its lowest point. With all the uncertainty surrounding the UK’s future, its leading share index has been remarkably resilient, how can this be?

Global Twist

The FTSE100 Index is the market indicator many Brits use to assess the general health of the UK share market, but it’s recent strong performance is at odds with the generally negative sentiment towards the Brexit result.

There is one explanation. Many of the companies represented in the FTSE100 are huge multi-national corporations and approximately 75% of the profits they generate come from outside of the UK. These profits have subsequently enjoyed a boost when converted back into a now weakened sterling, meaning lots of happy investors and a buoyant index for the time being.

Compare this with the FTSE250 Index, which is arguably a truer representation of sentiment towards UK companies, and you’ll see this has been more volatile. This initially fell by around 14% after the Brexit result, but has this week all but recovered these losses. Not the worst scenario given the levels of speculation surrounding the future health of the UK economy.

This is why you should diversify

We’ve seen what market indices have done, but how have real-life client portfolios held up? At Arkenstone Wealth Management, for example, we operate a series of model portfolios, which invest in shares, bonds and property stock all over the world. Below are two charts showing the performance of the balanced risk Arkenstone Model Portfolio D since Brexit and over the past 12 months (versus the FTSE100 and more importantly, its relevant benchmark).

A – Arkenstone Model Portfolio D
B – FTSE100 Index
C – IA Mixed Investment 20%-60% Shares (benchmark)

1 month view

12 month view

As with all market investments, capital is at risk, the value of your money can go up and down at any time and past performance should not be seen as a guide to the future. The Arkenstone Model Portfolio is not a personal recommendation and has been included purely for illustrative purposes.

What does all this tell us?

Well, provided you’ve been invested in a portfolio with a clear and robust strategy, it’s paid to stay diversified. You can be forgiven for assuming that a portfolio might simply follow movements in the main market indices quoted in the daily news, but the above charts show just how much divergence there can be between them.

In terms of what’s going on in the UK right now, that’s open to any number of interpretations. Perhaps markets have accepted their initial over-reaction and returned to relative normality (whatever that is) and maybe it’s the ‘Theresa May effect’ (she’s generally viewed as a safe pair of hands).

Whatever the reason, I do know one thing: the calm won’t last. Political negotiations are never easy and if we see some sort of stand-off or a trade deal falls through, markets will start to wobble and the media will have some new narrative to peddle, which in turn could further spook investors. We’re entering a process that no-one truly really understand, so be prepared for investor expectations to change like the wind…but haven’t they always?

Have a diverse investment strategy, keep an eye on the long-term and block out the noise in the short-term.

“Stocks are bought on expectations, not facts”. (Gerald Loeb, Wall Street trader)

If you’ve been putting off reviewing your investment or pension strategy, now’s the perfect time to get in touch. I’d be delighted to help in any way I can.

Thanks for reading.


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