The FTSE 100 opened with its largest loss in history this morning after the UK voted to quit the European Union but this might not be the time for investors to rush for the exit and crystallise their portfolio’s losses.
In a referendum that was described as “too close to call” just before the polls closed, there were 17,410,742 votes cast in favour of Leave and 16,141,241 for Remain. This meant Leave won with 51.9 per cent of the votes against Remain’s 48.1 per cent.
The referendum results in full
Source: BBC
The markets seemed to have been expecting a Remain victory – the day before the referendum saw sterling climb to a 2016 high and FTSE 100 end the session in positive territory. Those expecting a relatively smooth ride for markets in the weeks ahead woke up this morning to find things in a state of apparent panic.
There is the argument that emotion and enthusiasm trumped experts and economics in this referendum. Looking forwards, it’s important that a surge in emotion now doesn’t lead to poor investment decisions.
Polls by YouGov consistently found that voters believe the UK economy will be worse off outside the EU. However, they didn't think they would be significantly affected at a personal level - despite the prospect of an emergency Budget (seen by some as a 'punishment Budget') from the chancellor.
Today, the sentiment that ‘I’ll be OK’ could be wavering. Sterling plummeted to its lowest since 1985 as late assumptions of a Remain victory were rapidly unwound. The FTSE 100 fell 637.5 points, or almost 10 per cent, in the first 10 minutes this morning before recovering slightly and is expected to stay volatile for the foreseeable future.
For those keeping a close eye on their portfolio, this might start look like they are being now affected personally - quickly and harshly.
Even those with short memories are likely to remember the events of the global financial crisis and the eye-catching stock market falls that came with it.
Performance of indices in 2008
Source: FE Analytics
Over this period, the FTSE All Share suffered a 41.09 per cent maximum drawdown while the MSCI AC World lost 34.30 per cent. And stock markets took years to recover.
What's important to note, without overlooking the monumental significance of yesterday's referendum, is that this is unlikely to be another 'Lehman moment' for global markets.
Yes, the exit of the European Union's second largest economy puts the viability of the EU project to its most severe test yet, especially if other members follow in holding their own remain/leave referenda.
But it is arguably much less of a threat to the health of financial markets than the potential collapse in the worldwide banking system that investors had to wrestle with in 2008. The UK is now subject to heightened political and economic uncertainty but any expectation that this result will bring down the global economy seems to be off the mark, at this juncture at least.
Another important difference between now and 2008 is the surprise factor. While the result delivered this morning was a shock to some, the potential for 24 June being the day that particular outcome might happen had been known for more than four months.
To some extent, the possibility of leaving was already priced into UK assets and the market knows that there will be at least two more years – albeit uncertain ones – until the country across breaks from the union.
Of course, the decision to leave does put some heavy storm clouds over the UK, Europe and to a lesser degree the rest of the world. To say that the UK economy will come through this without a scratch would be naïve and there is a real risk of a recession at some point in the future.
But accepting that some significant difficulties lay ahead should not necessarily prompt a knee-reaction within portfolios. Volatility is likely to persist for some time, bringing with it the possibility of both losses and opportunities.
Now is a time for financial advisers and wealth managers to communicate with their clients, explain how they are positioned at the moment and how their portfolios are expected to hold up in the weeks and months ahead.
For some, this may be a time to go more cautious and wait until more certainty can be found; others may be willing to add risk and buy when market seems to have fallen too far.
But much like the referendum itself, this is not a time for anyone to act without first considering where they want to be in the long term and thinking calmly and rationally about what to do – be that selling out and heading for safety or jumping on the next compelling ‘opportunity’.
Gary Jackson is the editor of FE Trustnet. The views above are his own and should not be taken as investment advice or the views of FE.
