Friday, 24 June 2016

Britain Votes to Leave the European Union - What's Next for Investors?

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The results are now in, Britain has decided to leave the European Union. You will no doubt have many questions around the implications of the decision, and we are on hand to offer any support we can. This post offers some commentary on what this result could mean for you as a personal investor.

Market volatility and uncertainty

The market has been subject to significant volatility and uncertainty of late and this will be exacerbated by the vote to leave and the likely political changes which will come about within the UK Government. The market will likely respond unfavourably to this potential short-term uncertainty and while the market may be expected to decline in the short term, a fall in the value of sterling relative to the Euro and/or Dollar will actually make UK exports more competitive and will boost the sterling equivalent of overseas earning for many of the large corporates in the FTSE 100. Therefore, after an initial dip, the market may return to a focus on those underlying fundamentals which may be favourable than the initial reaction might suggest.

Personal investors should also note that while the market may be driven by sentiment in the short term, not all companies will be affected in the same way by the vote to leave.  Even within the same sector different companies will be impacted in different ways.  In time the market will differentiate between those companies and this may serve to demonstrate that any initial blanket market reaction will in fact have provided buying opportunities for discerning investors able to differentiate between the impacts on different companies.

The negative short-term outlook may soon be reversed for those companies which will benefit from their exports being more competitive or their overseas earnings being more valuable in Sterling terms.  Investors will need to be sure-footed in identifying those companies which may benefit from the outcome of the vote and look for opportunities where whole sectors have been written down without any meaningful differentiation between companies to reflect the variation in impact the vote will have.  The market will return to valuations based on fundamentals in due course.

It is vitally important for markets and for personal investors that any changes in Government take place swiftly and that those charged with negotiation our exit from the EU set out as clearly as possible how they plan to steer the course for the UK going forward.  We would urge the Government not to undertake any knee-jerk reactions in terms of an emergency budget, and shout such a budget be deemed necessary tax incentives which encourage investment should not be a target for savings. To do so would be short sighted as the UK economy now more than ever before will be reliant on the small businesses, many backed by personal investors, to drive economic growth and future employment.

Sometimes doing nothing is best

Investing in the stock market can be very rewarding.  However, as share prices fluctuate, it is also possible that you can lose money. This can particularly be the case when you react to short-term stock market falls.

Stock markets go through periods of uncertainty and although the sharp falls that can be experienced at such times is understandably unsettling for investors, even tempting some to change their long-term planning by selling their investments, stock market volatility does tend to be short lived and therefore most experts agree that investors are probably better off sitting tight through these unnerving periods.

Those who sell or delay making new investments when stock markets become uncertain are actually employing a strategy known as 'market timing'.  The intention is often to invest once stock markets have calmed down or to buy when stock markets have gone even lower.  This can be a very dangerous strategy.  Sharp falls in stock markets tend to be concentrated in short periods of time.  Similarly, the biggest gains are often clustered together.  It is also quite common for a large gain to follow a big fall (or vice versa).  Accordingly, an investor who tries to anticipate when the best time is to invest runs a very high risk of missing the best gains.  This can have a big impact on their long-term return.

The information gathered for this post has been derived from articles from The Share Centre and Fidelity FundsNetwork in conjunction with the views and opinions of the Senior Partner at GDA Financial Partners.

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