A number of clients have asked our views on Brexit. Essentially, the forthcoming vote provides further market uncertainty. In the event of a vote to remain, this uncertainty will dissipate and should - all other things being equal - lead to a rally. In the event of a vote to leave, uncertainty will increase and is likely to induce risk aversion and a spike in volatility whilst markets absorb the implications. Having said this, it is worth noting that sterling weakness in the event of Brexit would in theory provide an element of support for UK equities as so many of the index’s constituents make a large proportion of their sales overseas.
At this point our expectation is that the electorate will vote to stay given that the “certainty” of the status quo will create a very high threshold for those seeking exit to overcome. In the long run, though, it is arguable that the fundamentals of the economy may well be little changed either way. The innovation-driven global economy consistently delivers growth and central banks stand ready to act should the risks of deflation and poor sentiment grow. The ultimate path for the global economy is therefore one where inflation is a necessary outcome and equity markets move higher.
As long term investors we are focused on this prospect as opposed to being over-sensitive to fears of the day. We continue to invest for the long term and remain attracted to companies with strong balance sheets that are capable of generating attractive returns throughout the cycle, despite short term market volatility.
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