James Dowey, Chief economist & CIO
In these very early stages following the “Leave” win any prognosis is by its nature highly tentative. It will be weeks before we are able to measure the acute impact of the result on the UK economy, and there are clearly no close historical parallels on which to base reliable predictions. Moreover, it will be months – in some cases years – before we have answers to the major domestic political questions: who will lead the country following David Cameron’s resignation, will the transition of power necessitate a general election, what will Britain’s economic relationship with the EU look like once the exit is complete, what will it look like in the interim, might the thumping “Remain” win in Scotland trigger a Scottish exit from the UK?
Furthermore, global financial markets during the coming weeks and months may prove to be influenced more by knock-on effects of Brexit within the rest of the EU than by news from Britain. Will Brexit trigger a contagion effect within the EU, might the viability of the euro once again be called into question?
Financial markets abhor such imponderables and we should expect news related to the questions above to create further volatility in asset prices over the coming days, weeks and months.
Nevertheless, in the face of these new, and in some cases “old new”, challenges to the investment outlook, we believe investors should retain significant confidence in the mitigating effect of the policy response of central banks, even in the context of their somewhat frustrated attempts to generate accelerating growth and inflation in parts of the developed world during recent years.
The key distinction here is the strong capability of today’s central banks to calm conditions of financial distress, putting a floor under economic activity, as opposed to their relatively weak capability to boost a sluggish economy. Moreover, central banks are today much better at calming financial distress than they were even a decade ago. They have certainly had a lot of practice in the interim. This has enabled them to develop effective tools, to “learn by doing” and to build the confidence to act quickly.
This was evident in Bank of England governor Mark Carney’s public statement, in which he set out the contingency planning that the Bank has prepared over the past few months and articulated the willingness of the Bank to do whatever is necessary to stabilise the financial system. The US Federal Reserve, the European Central Bank and the Bank of Japan have all also released statements of willingness and the availability of tools to stem financial distress.
To be sure, the problems to be addressed following the referendum result are political ones, and will require political processes that are likely to prove to be drawn out, less than efficient and to retain unpredictable elements for a long time to come. But we believe investors should remember that the extent to which such political stress affects the fundamentals of companies is limited by circuit breakers such as those central banks have committed to applying. Moreover, we believe good companies adapt to the changing “rules of the game” set by the political process and can take opportunities to thrive. We will be monitoring very closely both the risks and opportunities arising from this extraordinary day in British history.
The value of an investment and any income from it can fall as well as rise and you may not get back the amount originally invested. Forecasts and past performance are not a guide to future performance. These are Neptune’s views and as such this document is deemed to be impartial research. Any forecasts, projections or targets are to provide you with an indication only and should not be relied upon. Some information and statistical data herein has been obtained from sources we believe to be reliable but in no way are warranted by us as to their accuracy or completeness. Neptune does not give investment advice and only provides information on Neptune products. Please refer to the prospectuses for further details.