The UK has chosen an uncertain path and this morning’s market reaction to the surprise defeat of the remain camp in the Brexit referendum is not surprising. As most market participants expected, a vote in favour of leaving the EU has led to sterling, the euro and equities falling, whilst risk off assets including bonds, gold, the yen and the dollar have risen as shown below.


Despite the significant move overnight, if we look back over the past two weeks the movement in markets is less significant given that this morning’s movements  have, in the main, reversed the moves of the past fortnight ahead of an anticipated win for the remain camp.

The politics of how this vote will be implemented will create uncertainty for many months, if not years, and is likely to keep volatility elevated. However, in many ways the vote will not be as negative on markets as implied by the predictions of calamity by many business commentators, politicians and remain campaigners. For a start Central Bankers are likely to respond to the vote by supporting markets; the Federal Reserve in the US is likely to delay any rise in interest rates further, whilst Central Banks in the UK, Eurozone and Japan are likely to increase intervention in order to prevent a “Lehman” moment.  Longer term, yesterday’s vote could be a key event on the road to a much needed loosening in fiscal policy in Europe as politicians work to prevent a European recession. In essence we believe that the world need not enter a self-inflicted recession on the back of this vote.

Looking at portfolio performances today, diversification across asset classes; with high cash balances and exposure to bonds and gold has helped reduce the impact of the market falls. Our decision to maintain high exposure to non-base currencies for sterling and euro clients has enabled currency diversification to protect portfolios from part of the market fall, whilst for US$ clients where we have a higher base currency exposure (typically of 70% – 80%) the impact of the stronger dollar has been detrimental in nominal terms but contained. Our slight underweight in equities has helped performance on a relative basis and may eventually help in absolute terms if markets weaken further and provide us with an opportunity to add to equities ahead of a recovery.

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