Charles Stanley says ‘good’ Brexit scenario more likely than ‘bad’

Added 30th June 2016

In the wake of last Thursday’s referendum Charles Stanley has run ‘good’ and ‘bad’ Brexit scenario models and says it sees the good scenario as more likely.

Charles Stanley says ‘good’ Brexit scenario more likely than ‘bad’

“It is important not to exaggerate the economic impact of Brexit, particularly in the next year or so when the process takes time to achieve,” said chief global strategist John Redwood. “This is an important political event with a big impact on UK and European politics, but if carefully managed it will have only a modest influence on the economic performance of the UK and the EU in the short term.”

The FTSE 100 index has cumulatively bounced back by approximately 4.6% since Tuesday and is well above the February lows, Redwood stated. UK government bonds have also continued their ascent and the sterling value of many overseas share investments is up as well, he noted.

“Most of our models and funds are higher today than before the vote, illustrating the advantages of holding a diversified portfolio,” Redwood highlighted. “They have made money overall thanks to the gains on currencies and bonds.”

Many commentators have flagged up reduction to UK trade and investor confidence in the UK as the two potential adverse effects following Brexit, Redwood noted.

While he admits the adoption of new tariffs and the relocation of a high number of companies from the UK to the continent could make growth for the UK difficult, he does not believe this scenario will actually play out in the medium term.

“Similar fears were expressed when the UK did not join the euro, but they did not materialise,” Redwood remarked. “It is said markets do not like uncertainty, yet it is their purpose to trade in expectations of change. If we hadn’t been worrying about Brexit we would have been worrying about the oil price or Chinese banks or what the Federal Reserve board might do next,” he added.

David Jane, manager of Miton’s multi-asset range, had a noticeably different view. He cautioned that we should not underestimate the uncertainty of the Brexit vote over the medium term nor the power of investor confidence.

“The market attempts to price the immediate impact in the first day or so, while the longer term impacts generally take several weeks or months to be fully reflected in asset prices, depending on the seriousness. Brexit is likely to be similar,” Jane said.

“Currencies have been at the heart of the storm and the medium term effects are also likely to show up here, he added. “The decline of sterling has been dramatic, but the uncertainty surrounding the medium term outlook is likely to continue to weigh on the pound over the coming months. Can this persist given the competitive advantage UK exporters will get from this, particularly versus the European and Japanese competitors with attempts from the ECB and the Bank of Japan to weaken theirs?”

“We think the Brexit vote is likely to reinforce what was already a negative tone economically and in markets, which leads us to have more conviction in our core “lower for longer” view,” Jane continued. “We are avoiding obvious areas of risk, in currencies and cyclicality, while emphasising those thematic growth areas which might succeed despite a deteriorating backdrop.”

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