Carry On Regardless - Brexit one week on ...

What a shock last Friday was. I woke up and the world looked very different. Nothing to do with Brexit, but rather it was my first morning at Glastonbury. Damp, cold, muddy and I was eating Frosties out of a plastic coffee cup. The day was to go downhill after that, which was very much to do with Brexit.

A fitful night’s sleep had enabled me to keep abreast of how the result was heading and I had already planned a series of early morning calls with my team. “The market is shut for business, the maximum market size in Unilever is £100 ...” was the first bit of news. “The PM is stepping down …” was the second. “The Opposition is imploding …” was the third and “Scotland wants to stay in Europe and have another referendum ...” was the fourth and final bit of news before I decided to go in fruitless search of a 3G signal to check it wasn’t all a monumental wind-up.

I didn’t choose to go to Glasto (as my kids called it!), but rather my wife thought it would be a great birthday present (to me), for us to share. Having a course of action imposed upon me against my will once in a weekend is unfortunate, but twice…?!

I was quoted during the campaign as being a reluctant realist, preferring us to remain in the EU. Not because I disagree that we should Sail This Ship Alone, but rather because I have doubts that the economy is strong enough at the present time to deal with the choppy waters that we will need to chart along the route to independence.

This view was reinforced by a fear that a vote for independence would lead to a wounded Europe fighting for its very survival, resulting in an inevitable backlash against the UK. Nothing has happened this week to change my mind.

Whether people truly understood what they were voting for is now for the history books and the conscience of those politicians and business leaders on both sides of the argument. Seeing Boris backtrack on his reasoning for supporting Brexit, watching Nigel Farage triumphantly goading fellow MEPs with his, “You’re not laughing now, are you…” taunt and witnessing Cameron’s about turn on his claim he would stay in office if he lost the vote all add grist to the mill for those who question the integrity of politicians. It has been interesting that most of the high profile business leaders that supported a Brexit have been uncharacteristically quiet since the outcome was announced.

Whilst Adele and Coldplay were the stand-out performers at Glasto, Paul Heaton, former lead singer of The Housemartins and Beautiful South, was one of my personal favourites. He summed up the mood perfectly when he said, “Is it just me, or did anyone else wake up this morning and think what the **** have we just done?” It drew one of the loudest cheers down at The Other Stage that I heard all weekend.

Back in the warmth of West Lancashire, I have had a chance to reflect on what the first week since the Brexit vote has brought us. While the UK’s decision to vote ‘Leave’ was clearly a surprise to the financial markets, their response so far has been predictable, with clear winners and losers emerging:


  • Riskier assets such as shares have become more volatile, although the main FTSE 100 and FTSE 250 indices have recovered all the ground they lost in the immediate aftermath of the vote and were trading higher at the time of writing. Markets have taken some comfort from Governor of the Bank of England, Mark Carney’s confirmation that the central bank is prepared to step in and do whatever it takes to maintain economic growth, although given that the February market wobble was the result of a sudden loss of faith in central banks’ abilities to fuel a strong recovery, it remains to be seen just how potent the Governor’s intervention proves to be.
  • The UK stock market has been volatile but Europe has done much worse, owing to fears the ‘Leave’ vote could spark calls for similar ballots across the continent. The Italian, Spanish and Portuguese markets have been especially hard-hit, as have banking and financial services stocks, as investors, clients and advisers have pondered whether a fresh economic downturn will add to political turbulence across the EU-27.
  • Within the UK stock market, stocks with heavy exposure to the domestic market have been treated particularly harshly, notably house builders, property stocks and retailers amid fears of a recession. Banks and financial services stocks have suffered due to concerns about loss of ‘passporting’ rights and access to the EU’s markets.
  • The pound has been pummelled, plunging to three-decade lows against the dollar.


  • Within the stock market, defensive names, low volatility stocks, strong cash flow generators and dollar earners have done relatively well or even gone up in absolute terms.
  • Government bonds have soared as investors have scrambled for a haven, seemingly irrespective of the low yields on offer.
  • Gold and silver have moved sharply higher, dragging precious metal miners along with them.
  • The dollar and yen have risen sharply, owing to their haven status.

Given the uncertainty over when (or even whether) the UK will ultimately invoke Article 50 of the Treaty of Lisbon and formally withdraw from the EU, and the absence of a crystal ball to tell us what this will ultimately mean, markets seem likely to remain volatile.

Volatility is not a problem in itself, providing a portfolio is sufficiently well balanced and diversified that an adviser and their client can take a long-term view and get through to the other side. Volatility can even be a chance to take advantage of market inefficiencies, by selling assets expensively or buying them cheaply.

Advisers will nevertheless be resisting the urge to tinker with their client's portfolios for the sake of it because trying to time the market is notoriously difficult. There must still be a strong valuation case for any action and portfolio changes should fit with their overall strategy, time horizon, target return and appetite for risk. As Warren Buffett put it, using a baseball analogy, you don’t have to try and hit every ball and you are not faced with a limited number of chances to bat: “The stock market is a no-called-strike game. You don’t have to swing at everything, you can wait for your pitch.”

With that in mind, there are four key issues which now confront portfolio builders, which you may have seen our Investment Director Russ Mould talking about in his latest video.

  • Will there be a UK recession? If so, and sterling remains weak as a result, one possible hedge would be to seek out overseas exposure. Equally, further sharp falls in stocks may present valuation opportunities to brave, patient contrarians, either because the bad news gets priced in or the market’s worst fears are not realised as the UK does better than feared. This could be meat and drink to value-oriented equity funds, even if expensive defensives and quality names remain in vogue for now.
  • What to do for equity income? Some may be happy to bank regular coupons or dividends from bonds, stocks or funds and plan their cash needs accordingly. Others may be unhappy to have to face the risk of capital losses as they seek out reliable income. With regards to the UK, it is unlikely investors will change their approach, as this is a long-term strategy and the dependable yield-generating stocks have held up relatively well, at least so far. Risk-tolerant portfolio-builders could even look to European equity income funds – as there is a deep pool of European dividend payers to investigate – or to Asia and Japan, where more companies are focussing on shareholder returns much more intently, even if the UK still offers a premium dividend yield.
  • What to do about other forms of income as Government bond yields grind ever lower? Some may view bonds as return-free risk now, but interest rates are unlikely to rise in a hurry anywhere in the West and inflation seems subdued for now. Corporate spreads have widened so corporate bond and flexible bond funds will be looking for value here, especially at the long end, with rates seemingly unlikely to rise.
  • What to do about gold and silver? Some will never touch these so-called barbarous relics while others will warm to them. Any shift in inflation expectations could keep the rally going, while a deflationary downturn could deaden interest in them. It is worth bearing in mind that the referendum vote reflected discontent with the dominant economic narrative of austerity. If the pendulum swings to more fiscal stimulus (higher public spending) then the precious metals could do well (alongside index-linked bonds) although the market will take careful note of where the money comes from. More QE would potentially boost metals and hurt bonds. Higher taxes would hurt corporate profits and potentially share prices, especially as markets like the UK and USA still trade on higher multiples of market cap to GDP relative to history.

We will see politics, economics and investment markets interact like never before over the coming weeks, months and years.

The UK is asking for A Little Time. It needs to find a new PM and quite probably a new leader of the opposition before triggering an exit under Article 50. We will have no choice but to Carry On Regardless as the UK decouples itself from the European Caravan Of Love.

I am reliably informed that the mud at Glasto this year was as bad as it has ever been and I certainly wouldn’t want the job of cleaning our forty foot motor home after we left! To make matters worse, the traffic was absolute carnage, or so it looked from our bird in the sky as we flew home! I just don’t know how we coped?!

Glasto was an experience that in all honesty I was dreading, but I quickly realised that with the right mind-set and a great group of people, it was a lot better than I feared. Hopefully our departure from Europe will take a similar path.

In other news - Fair-value pricing adjustments

Following the Brexit vote you may have seen stories in the media about some fund groups applying fair-value pricing on certain funds.

This pricing approach tends to be used when a fund's valuation point occurs at a time when the market in which it is invested is closed, and there are significant market movements which indicate that the value of the assets is no longer accurate. In practice, the fund group temporarily adjusts the price of a fund when they know that the calculated price does not accurately reflect the true value of the underlying assets.

The decision to apply a fair-value adjustment is taken at fund group level, and any change made is not visible to us at platform level.

If you are deciding whether to invest in or sell holdings in a fund and you suspect that fair-value pricing may apply, it would be prudent to seek clarification from the fund group in question.


Andy co-founded AJ Bell in 1995, having spent a number of years working within the financial services sector. Graduating from Nottingham University in 1987 with a first class degree in Mathematics, he qualified as a Fellow of the Institute of Actuaries in 1993 and has built AJ Bell into one of the UK’s largest investment platforms.