Post-Brexit Thoughts: We’re facing a Long and Winding Road!

At the time of writing this article it has been nearly seven weeks since Britain’s momentous vote to leave the European Union – but it might be a while longer before the economic impact becomes clear!

The decision has led to a degree of uncertainty, both politically and within the UK economy. The moves to detach the UK from the EU will take at least two years – and is unlikely to be a smooth process.

We are still at the stage where each piece of economic data – and there are new figures coming out every day – is seized upon by both sides in the argument as evidence that they were right about the effects of Brexit on the economy.

• Employment is at record highs – yet there is a significant slowdown in the construction industry.
• Lloyds Bank is closing branches and making staff redundant – yet US bank WellsFargo is spending £300 million on a new European headquarters in London.

In the weeks since the vote, the FTSE 100 has rallied – in part because a very weak pound has boosted profit forecasts for businesses. The FTSE 250 saw an initial sell-off, but has also since recovered.

In our view, there are a couple of other reasons why the stock exchanges have rallied.

Firstly, the rapid appointment of Theresa May as the Prime Minister to lead us into the post-Brexit world has provided a short-term boost for the markets, and has also helped settle the nerves of investors.

Secondly, there is also unprecedented central bank intervention across the world, and this has also had an influence on markets. Taking a lead in matters, the Bank of England this week (in a policy endorsed by the new Chancellor of the Exchequer) reduced its base rate to 0.25% and launched a new tranche of Quantitative Easing (QE),

A focus of central banks is providing liquidity to bond markets where the core yields have fallen. In the midst of this there is a suggestion that core bond yields could fall further, forcing investors to look for returns wherever they can find them.

This is not just due to the Brexit vote – the central banks are responding to deflationary pressures around the globe, with governments attempting to curb spending and reluctant to carry out structural reform.

This has been going on for a number of years, and with no end in sight investors, have concluded that there is little option but to consider equities.

There is little chance of bond yields rising in the short term as central banks try to keep them low to encourage growth. Gilt yields are also falling to the point where UK equities are yielding four times what a ten-year gilt will yield. This means investors looking for a return on their investments are turning to risk assets.

Looking ahead, we are also addressing our thoughts to the impact of the US election result in November on the world economy – with a sharp divergence of views of the future set out by rival candidates Donald Trump and Hillary Clinton.

What is clear is that the post-Brexit economy has not been as badly hit as some had predicted in the run up to the referendum, but there are still uncertain times ahead as we sail into unchartered waters.

Innes Reid’s investment processes are tried and tested and we continue to do everything in our power to help our clients to navigate these market conditions.

Call us today on 01244 347583 or email info@innesreid.co.uk to arrange a free, initial consultation – we are available at times to suit you