The result of the EU referendum, backing Britain to leave the EU, has sparked a wave of selling across financial markets. The pound, banking stocks and Eurozone equities have registered some of the biggest falls in the immediate aftermath of the referendum result but perhaps most telling has been the move in government bond markets. The UK 10 year gilt has fallen 27 basis points to a record low of 1.11% yield as investors flee to the safety of government debt.
It is inevitable that there will be further short-term headwinds to performance as the markets deal with the implications of the result. However, judging the long-term impact to the UK economy so soon after the result is difficult.
EU law has had precedence over UK law for 40 years and leaving the EU clearly has significant implications on our legislative framework.
Most economists are predicting a hit to GDP growth and also foreign direct investment. Inflation is predicted to rise due to the weakness of sterling, however the currency fall could provide a boost to Britain's exports.
Within our Dynamic portfolios, we took the decision to reduce risk across our range in mid-May over the referendum uncertainty, and the elevated valuations seen across the main equity markets. This was done by moving some capital out of equity markets and into cash and bonds.
In addition, we have built globally-diversified portfolios with significant non-sterling exposure. Our global bond and global equity funds will benefit from the falls seen in sterling.
Finally, we continue to hold government bonds in our portfolios, despite the low yields on offer. These will provide a significant boost to returns as sovereign bond yields fall.
Our work now will be to focus on economic and corporate fundamentals facing the UK and the global economies, and we will look to use our long-term, value orientated philosophy to seek opportunities to add long-term gains for client portfolios. It is often in periods of uncertainty like these the biggest gains can be made.