As the UK has decided today to leave the EU, our investment experts analyse the short and long-term implications of the outcome.
Paul Lambert, Head of Currency, Insight Investment: “This historic outcome is likely to have a lasting impact on sterling. In our immediate line of sight, we expect it to bear the brunt of what are likely to be less favourable relationships with some of the UK’s most important trading partners. In addition, and over the longer term, it will need to adjust to what is likely to be a significant and negative growth shock as businesses and consumers defer spending activity until there is greater clarity on the direction on the terms of the exit."
Howard Cunningham, Fixed Income Portfolio Manager, Newton Investment Management “The leave result is likely to be supportive of shorter dated gilts as activity slows and the prospect of interest rate increases recedes even further into the future. The gilt curve may steepen as investors demand more compensation for the longer term uncertainties, but overall yields should not necessarily be higher. It is worth bearing in mind that, to the extent investors initially view the leave vote negatively and want to dump sterling assets, we doubt gilts will be top of their sell lists. Sterling corporate bonds face conflicting forces and greater uncertainty may ultimately lead to risk premia, i.e. higher credit spreads (particularly for UK domiciled issuers).
“It is important to point out that with yields on euro denominated bonds already low, sterling corporate bond yields might look more attractive. Particularly if, as we expect, ECB intervention has unintended negative effects on liquidity in the euro corporate bond market.”
Paul Hatfield, Chief Investment Officer, Alcentra: “We think the short-term impact will definitely be negative for the UK economy, with the uncertainty delaying investment decisions and stalling spending all round. Longer term, it is possible the UK can renegotiate a good outcome with the EU but it hasn’t said how, or on what basis. You could see the other EU countries making life difficult for the UK after Brexit, partly out of pique and partly to deter other countries from doing the same.”
Mark Bogar, European Smaller Companies Manager, The Boston Company Asset Management: “Follow-on risk is now a major factor and we have to think about potential knock-on effects; for example, other countries voting on their membership of the EU. If this leads to an unravelling of the EU the hit to economic activity over the immediate term will be significant. I like to think over the longer term countries will figure it out – and will continue to trade with one another – but it could take up to three years to iron out the ‘new order’ and in the meantime economic activity and GDP growth in European countries will feel the impact. In my opinion the Eurozone will go into recession again during that time.”