Nearly a week after the historic Brexit vote in Britain, financial professionals in the United Kingdom say they are taking a cautious approach to the markets. But they are also a bit anxious to see how companies adjust investments and what measure the government takes in response.
Like investors everywhere, they were caught slightly off guard by the winning leave-the-EU campaign.
“The polling was quite close … and we were most surprised with the result along with [others],” said Chris Bailey, a London-based investment strategist with Raymond James, in an interview. “We were very surprised, despite the tight polls. In reality, as we are seeing the post-vote data, some factors were quite tough to gauge.”
Often in geopolitical matters, the status quo prevails, Bailey points out. On Sunday, for instance, Spanish voters favored establishment parties over more protest-oriented ones.
“Our clients were initially in a state of shock, then it became wait and see, which we advised them to do,” he explained, and the situation in the U.K. is still full of uncertainty.
On Friday, clients were certainly concerned, but only about 5% of them picked up the phone to call wealth manager Matthew Hunt, principal and founder of Prospect Wealth Management in London. “As sterling and the market rose the day or two before the vote, I was surprised so few clients contacted us on Friday,” he said in an interview.
Hunt’s group sent out a note to clients about Brexit “and recommended they wait for the dust to settle,” he says, noting that some markets and investments have rebounded.
“It’s still a highly polarized market, though, with British Airways trading at a price-to-equity ratio of 4,” the wealth manager stated. “There is a lot of uncertainty out there.”
Sixty percent of clients opened the note on Brexit that Hunt’s group sent out. “That’s a big hit rate, much higher than normal,” he said. “I think it helped put [clients’ concerns] to rest … They can look at their portfolios online – right now, with portfolios that are half in equities and half in bonds down about 4%, which is not catastrophic.”
An ‘Own Goal’?
About 52% of British voters opted to leave the EU, and 48% to stay in it.
“That’s a narrow majority,” said Bailey, and the vote could easily have gone the other way, many thought. “Really, you could argue that the U.K. scored its own goal,” the strategist explained, drawing an analogy to when a team scores a point in the area guarded by its own goalie, which gives the opponent a point. “With the uncertainty, economic growth could be lower for a year or two, the Bank of England might cut rates sooner rather later, there’s turmoil in the government … and it’s reinvigorated the Scottish independent campaign.”
The pro-leave voters believe “the modern economy had not done them many favors,” he added. But, ironically, it is the average voter who may have supported Brexit that “will be most directly impacted” by it in negative ways.
Asked if there are any investment or other lessons to be learned from the situation, Bailey says “trying to hedge is very difficult to do,” given the associated costs, “and moving into government securities only can also be an expensive solution.”
Plus, if things “go the wrong way and you’ve sold a large part of a portfolio … you are then looking at buying [investments] back at higher prices,” he explains. Instead, the strategist tells investors “to accept the pain and take a medium-term view.”
Investors may want to consider options such as moving more funds into corporate bonds, securitized loans or utilities, since such investments are more protected from events like Brexit. “The returns are likely 3 to 5% with other risks involved, though, and they can have less liquidity.”
In other words, “Alternative approaches exist, but they come at a price. Portfolios that work [well] in all situations do not exist,” he explained. “We tell clients, that with an unexpected event, politicians and central bankers react … step in with liquidity or make … [other] changes.”
Though “black swan” events happen, “The outcomes often are not as bad as expected,” Bailey said, “and that is what is happening now.”
For his part, Hunt plans to closely watch corporate investments trends during the next earnings-reporting cycle, set to start in July. “That is the critical element,” the wealth manager explained.
Corporate investments are “nearly certain to slow,” he adds, “but by how much? And how will the government respond? It may have to prop up the economy.”
— Check out After Brexit Vote, Is ‘Stay the Course’ Really the Best Advice? on ThinkAdvisor.