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BREXIT Decision Shocks UK Markets

brexit_smlSentiment during June remained hostage to the fortunes of the referendum on the UK’s future membership of the European Union (EU). Market performance was volatile in the run-up to the vote; however, on balance, investors appeared to believe that most voters would ultimately opt to remain in the EU. However, in a surprising turn of events, a small majority voted by 52% to 48% in favour of leaving the EU. The news provided a substantial shock for investors: the FTSE 100 Index plunged by almost 9% following the news; sterling fell to a three-decade low against the US dollar; and gilt yields dropped sharply.

The result created a state of economic and political uncertainty, not only in the UK, but also further afield, as investors around the world digested the possible implication of Brexit. Pronounced weakness in the pound increased the appeal of companies with a high proportion of overseas earnings, providing a boost for the FTSE 100 Index, which ended June in positive territory, posting a monthly increase of 4.4%. Medium-sized companies fared poorly in comparison: the FTSE 250 Index fell by 5.3% during June, dragged down by negative sentiment towards its UK-focused constituents. Elsewhere, the FTSE Small Cap Index declined by 2.7% over the month.

In particular, the news raised questions about the longer-term future of the EU itself. Closer to home, the Brexit decision resulted in the resignation of the Prime Minister and a vote of no confidence in the Leader of the Opposition. It remains unclear when the UK will decide to invoke Article 50, which lays out the process of withdrawal of a member state from the EU.

According to Bank of England (BoE) Governor Mark Carney, the BoE remains “ready to provide more than £250 billion of additional funds through its normal facilities”. His subsequent hint that policymakers were likely to implement a cut in interest rates provided a welcome boost for share prices.

Credit ratings agency Fitch warned that the Brexit result was credit-negative for most industry sectors in the UK, citing a deterioration in medium-term economic growth and investment prospects, and uncertainty over future trade agreements. Meanwhile, ratings agency Moody’s downgraded its outlook on 12 UK banks and building societies – including Barclays, HSBC, Nationwide, and Lloyds – alluding to “heightened uncertainty over the UK’s future trade relationship with the EU”.

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