The EU referendum debate was characterised by bias, distortion and exaggeration and, although the UK may have voted on 23 June 2016 to leave the European Union it is still not fully clear what the country’s path to Brexit will actually mean.
Prime Minister Theresa May says that Article 50 of the Lisbon Treaty, which will kick off two years of formal negotiations, will be triggered before the end of March 2017. In practice this means the UK will be out of the EU by the summer of 2019 so there is clearly a long road ahead.
We know the impact of Brexit on British businesses, the UK economy and wider British interests will be severe and felt across multiple channels. Both the path and the endpoint, in terms of the new relationship between the UK and the rest of the EU, will lead to an uncertain future, compounding the costs to the UK.
However, the warnings of the economic consequences of the vote have been somewhat modified since it took place. It hasn’t been the baptism of fire that many expected for the new Chancellor, Phillip Hammond. The UK economy appears to have weathered the initial shock of the Brexit vote, although the value of the pound remains near a 31-year low. However, opinion is sharply divided over the long-term effects of leaving the EU.
Brexit – Sterling currency crisis and mitigating investment risk
We might not be heading for a Brexit inspired recession but it certainly seems as though we’re in the midst of a sterling currency crisis.
The FTSE 100 continues to push higher taking it closer to the 7,104 record reached in April 2015. But there is a clear caveat – many companies on the Index generate their revenue overseas, and so the fall in sterling will boost their earnings power. Also, the Index’s recovery is much less impressive if you price it in dollars.
At Hartsfield, we aim to mitigate risk within our client portfolios. The last six months have been one of the most turbulent periods in domestic politics that many of us can remember. Thus in light of these historic events, it would be fair to say that we are more pessimistic on markets in general, and UK markets in particular, than we were six months ago.
This has led to increase in portfolio turnover, as we strive to create an asset mix more suitable for the current environment and investors should not expect things to get any easier in the short term.
However, we remain highly confident in our investment approach and will always seek to provide the best possible risk adjusted returns within our fully diversified portfolios that hold up under the most extreme market conditions.
If you would like to talk about your investments, and how they fit within the context of Brexit, please get in touch with the Hartsfield team.