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23/02/17The economic outcome of the Brexit vote

The markets dislike uncertainty, and with last year’s Brexit vote taking us into uncharted waters, many people were expecting at least some economic squalls.

In fact, Britain’s economy bounced back from the initial shock with a speed and extent that caught many investors unaware.

What was predicted?

It’s true that in the immediate aftermath of the EU referendum, there was a great deal of volatility in stocks, with markets driven by the collapse in the value of the pound and concerns over the strength of the UK economy. Companies sensitive to a weakening of the UK economy, particularly in the FTSE 250 suffered. The value of the pound fell on foreign markets.

This much was predicted by the experts. The pound remains down, at around $1.20, but stock markets have recovered, and are now close to record highs.

An end to Brexit uncertainty

There seems to be several reasons for the unexpected turnaround. One factor was not directly related to the Brexit vote.

At the start of 2016, many global investors had a negative outlook. Markets were down, and there were concerns over deflation.

The global economy was showing signs of stalling before the vote. If global markets were lacking confidence, the UK market itself was mired in doubt with the prospect of the EU referendum. In the run up to the vote, this lack of confidence led to some big sell-offs across the market. Domestic sectors bore the brunt with financials, consumer services and telecoms all suffering.

Knowing the Brexit vote had been cast, allowed investors to start making plans accordingly. The poor performance of many sectors before the vote simply put them in a better position, as lower valuations made them more attractive to investors willing to take a longer-term view.

The cheap pound

The exchange rate for Sterling against the Euro and other currencies fell substantially after the Brexit vote.

The exchange rate is simply the price of one currency compared to another and it reflects the supply and demand for pounds in the market. The Brexit vote led to a fall in demand for British currency, driving down the price of Sterling. The result is a slowing of foreign investment into the UK, and a rise in the cost of imports.

When imports are more expensive it has a significant impact in sectors like energy. Oil is priced in dollars on the international market, so the cost of filling your tank has gone up, as have costs to UK industry. Imported food and foreign holidays are both also more expensive as the result of less favourable exchange rates.

But for the wider economy, a cheap pound may be a positive. Weaker sterling will flatter our trade and investment balances. UK-produced goods are cheaper overseas, encouraging exports, while investment returns on foreign-owned assets here in the UK will be depressed. If imports are more expensive, exports are much cheaper, providing a powerful stimulus for UK exporters.

Many of our biggest global companies are seeing higher overseas earnings thanks to the devalued pound. The improved prospects for the UK-based global giants has driven the FTSE 100 of blue chip shares to new highs, and has stimulated a major rally in the stocks of FTSE 250 firms.

The consumer and Brexit

Consumer confidence is a major driver of economic activity, and the boost to the economy of a cheap pound seems to have helped consumer confidence.

The simple fact is that if consumers are buoyant, then business and investment should expand to serve their needs. Of course, it is still early days, but whatever damage was done to consumer and business confidence in the UK in the days after the referendum, has been quickly overcome.

What should you do?

The terms of the exit itself have not been decided, and it is too early to say what the long term effect will be.

Of course, investments are best planned on the long term, so whatever your view about the current outlook it is essential to get advice from an independent financial adviser or broker. Simply contact us on 0208 9732410 for the help you need.

 

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