UK: Implications of the vote to leave are two-fold - Fidelity

Dominic Rossi, Global CIO of Equities at Fidelity International, comments that the implications of the vote to leave are two-fold; we are in the midst of both an economic and a political shock and believe the political shock will be greater than the economic shock.

Key Quotes

 “From an economic point of view, we can expect lower growth in the UK and across Europe, and that is now being discounted in equity markets.  We also expect a mild recession in the UK over the course of this year and into next year.  However, what matters more is that political risk premia will now rise around the world and this implies lower valuations.  Today’s result will set off a domino effect of political risk.  Whether it’s the US election later this year or the French election next year, investors are going to be far more cautious.

“This morning we have seen a knee-jerk reaction from markets, which were poorly positioned ahead of the vote.  We may have not seen the end of this; as the dust settles and the fundamentals assert themselves, it’s likely that sterling will continue to weaken against the US dollar and the Euro.

“For investors, diversification is key.  This means having a balance between sterling and non-sterling assets, alongside bond assets which will provide a store of value.  It’s also important to remember that there will always be large global organisations with very large balance sheets which in these times offer savers some protection.

“As investors, we use very difficult times like this to buy those sound sustainable businesses that we want to own at a discounted price. However, markets will remain volatile in the short term, so it is essential to tread carefully.”