Aftermath of UK Referendum
June 24th, 2016
UK Referendum delivers surprise to global markets
Shane Jones, Chief Investment Officer, Global Portfolio Advisory Group
Overnight the UK population voted to leave the European Union which has surprised global markets as the Remain vote was expected to win in a tight race. Equity markets are declining in every part of the world and have been hit especially hard in Europe while bond yields are moving lower and the USD is gaining against all other currencies.
So what happens next and why are markets declining??
1. Mr. Cameron has already spoken to the Queen and advised her of his plans to resign. This will probably come in October at the Conservative Party National Convention where a new Leader will be selected.
2. When does the UK invoke Article 50 of the EU which stipulates their intention to leave the Union? There is much uncertainty around this as the “Leave” leaders are now asking Mr. Cameron not to invoke yet as they claim there is no rush while Mr. Cameron has stated that the vote of the British public has to be honoured immediately. Interesting debate ahead. Once article 50 is invoked it will take approximately 2 years for Britain to completely leave the Union. (more on this in the Scotia Economics articles sent this morning).
3. Markets are declining on political and economic uncertainty both across Europe due to the vote and in other parts of the world due to the implications of a strong US Dollar.
4. Political uncertainty. There is no doubt that the Euroskeptic movements across the continent will take comfort from the UK vote and we will see many protests and debates in several countries as they look to potentially exit the EU. Spain votes in its National Elections on Sunday and this will be the first test for the EU. Nicola Sturgeon,
Scotland’s First Minister has already stated a referendum on independence is back on the agenda as Scotland wants to remain part of the EU (this was evidenced by the overwhelming “Remain” majority in Scotland).
5. Economic uncertainty. With the UK set to invoke article 50 how does this affect trade in Europe and with the rest of the world? The uncertainty will have a damaging effect on demand in many European Nations as both personal and corporate spending slows and savings rates rise. To put it simply if you don’t know if you have a job tomorrow then you do not spend today. There is now a heightened risk of recession ahead in Europe.
What do we do next?
Our first comment here is “don’t panic!” By acting in haste we are more than likely to sell at bottoms. We would rather take a more rational and measured approach to managing portfolios. Although this is a very special event, typically in events such as this we see an overreaction as Hedge Funds and fast money runs for the exits trying to make a quick dollar.
You also have the effect of hedging portfolios which further extends the decline. This action tends to slow after a few days and the market rebounds. By taking our time and being able to assess markets and economic effects properly this allows us to re‐position portfolios and protect our assets in a more measured fashion. Although the declines are very large for one day we are only back to the levels we were at a week ago in many markets so again we do not see the need to panic.
Aftermath of UK Referendum
As for the Canadian equity market we do not see as much of a negative reaction as other global markets as the domestic equity market is more defensive in nature with many dividend paying names and will also be supported by the gold trade. While crude oil is also declining this morning, we have been noting that supply/demand fundamentals have been moving in a supportive direction.
The market impact of UK’s decision exit the EU is unlikely to be completely discounted in today’s trading session.
Ultimately, we do see the sell‐off resulting in attractive opportunities to deploy cash in high‐quality, dividend paying companies.
We continue to recommend focusing on long‐term investing discipline with a focus on high quality investments within a balanced portfolio that will serve us all well in these volatile times.
Global Portfolio Advisory Group
Scotia Wealth Management
Aftermath of UK Referendum
The author(s) of the report own(s) securities of the following companies.
The supervisors of the Portfolio Advisory Group own securities of the following companies.
Scotia Capital Inc. is what is referred to as an “integrated” investment firm since we provide a broad range of corporate finance, investment banking, institutional trading and retail client services and products. As a result we recognize that we there are inherent conflicts of interest in our business since we often represent both sides to a transaction, namely the buyer and the seller. While we have policies and procedures in place to manage these conflicts, we also disclose certain conflicts to you so that you are aware of them. The following list provides conflict disclosure of certain relationships that we have, or have had within a specified period of time, with the companies that are discussed in this report.
Scotia Capital Inc. is a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund
The ScotiaMcLeod Portfolio Advisory Group prepares this report by aggregating information obtained from various sources as a resource for HollisWealth Advisors and their clients. Information may be obtained from the Equity Research and Fixed Income Research departments of the Global Banking and Markets division of Scotiabank. Information may be also obtained from the Foreign Exchange Research and Scotia Economics departments within Scotiabank. In addition to information obtained from members of the Scotiabank group, information may be obtained from the following third party sources: Standard & Poor’s, Valueline, Morningstar CPMS, Bank Credit Analyst and Bloomberg. The information and opinions contained in this report have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness.
While the information provided is believed to be accurate and reliable, neither Scotia Capital Inc., which includes the ScotiaMcLeod Portfolio Advisory Group, nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of such information. Neither Scotia Capital Inc. nor its affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents.
This report is provided to you for informational purposes only. This report is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation or particular needs of any specific person. Investors should seek advice regarding the appropriateness of investing in financial instruments and implementing investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.
Nothing contained in this report is or should be relied upon as a promise or representation as to the future. The pro forma and estimated financial information contained in this report, if any, is based on certain assumptions and management’s analysis of information available at the time that this information was prepared, which assumptions and analysis may or may not be correct. There is no representation, warranty or other assurance that any projections contained in this report will be realized.
Opinions, estimates and projections contained in this report are our own as of the date hereof and are subject to change without notice.
Copyright 2012 Scotia GBM Inc. All rights reserved
® Registered trademark of The Bank of Nova Scotia, used under license. HollisWealth is a division of Scotia Capital Inc. Scotia Capital Inc. is a member of Canadian Investor Protection Fund.