With the momentous events of last night’s EU referendum vote still being assimilated by financial markets, we wanted to share with clients the latest thoughts from our ad-hoc asset allocation committee meeting, held this morning, and any implications for client portfolios.
Clearly the ‘Leave’ result was counter-consensus, whether you looked at the ex-ante deliberations of market strategists, opinion polls or bookmaker’s odds.
With the US stock market near an all-time high yesterday and UK equities and sterling having rallied over the past week, as ‘Remain’ appeared to be the more likely outcome, there have been some wild reactions in markets today.
The immediate sell-off inevitably smelt of fear and panic, particularly earlier on today when ‘liquidity’, or the ability to be able to trade, was at its lowest ebb.
Asian markets closed sharply lower and the FTSE100 stock index dropped by almost 9% just after opening, but has subsequently rallied.
Today is most definitely ‘risk-off’, in the sense that sterling and perceived riskier UK financials and domestically-focussed stocks have sold off dramatically, whereas ‘safe-havens’ such as the US dollar, gold, government bonds and even ‘defensive’ equities have gained ground.
We were already cautiously positioned ahead of the vote, having taken numerous steps to protect the capital value of client portfolios.
To recap, we had carried out the following:
- We increased cash balances within portfolios.
- We lowered our overall equity weightings.
- Within equities, we reduced some of the more economically sensitive direct stocks and funds, which our style analysis indicated might perform adversely in a market downturn.
- We moved underweight UK equities, more than we have been since our inception as a business.
- Even within our UK equity exposure there are many holdings that, although nominally listed on the UK stock exchange, are purposefully held for their international, non UK-domestic bias. Many of these have actually gained ground today. Shown below are the turnover breakdowns for some of our current main UK holdings:
Royal Dutch Shell World ex Europe 64% Europe 36%
Experian World ex UK 80% UK 20%
Vodafone World ex UK 85% UK 15%
WPP World ex UK 85% UK 15%
Unilever World ex Europe 75% Europe 25%
Compass World ex UK 90% UK 10%
- We held onto our ‘quality compounders’ stocks, that typically are less sensitive to wider economic and political influences.
- We increased US treasuries holdings and these have benefited both from any ‘flight to safety’ and potentially weaker sterling.
- We increased exposure to ‘absolute return’ funds, that have protected capital in volatile markets.
- There is an allocation to gold, priced in dollars, which has performed well today and typically moves higher in uncertain conditions.
- Property exposure was reduced, either thorough sales of direct holdings or property funds.
- We hold UK index linked gilts. If sterling falls, due to our trade deficit with the world, the UK would most likely import inflation and index-linked should outperform UK conventional gilts.
The uncertainty that the vote has created is, at present, huge and there are wide implications for financial markets, not least further political unrest, the chances of ‘Nexit’ (whose else in Europe wants out?) and the fragility of the global economy.
As we begin along the process to extricating Britain from the EU, hardly anyone in Whitehall has any experience of negotiating bi-lateral trade treaties with other nations. It could therefore be rather a long drawn-out affair.
We continue to monitor events very carefully and are on-hand to answer any questions that clients may have.
John Langrish, Head of Investments
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