Brexit Comment

The biggest risk to any investor is abandoning a long-term strategy based on short-term anxiety.

The historic decision by the people of the UK to leave the European Union has no precedent. It will take time for the UK to re-establish relationships with Europe and the rest of the world.

Most of Nestor’s clients are long-term investors and can navigate the short-term storm. It is important to bear in mind that the UK is the fifth largest economy in the world and, despite the uncertainty over the coming weeks and months, we will remain a strong economic force.

Nestor’s Directors have been communicating with all our clients and professional connections during our regular review meetings since the Referendum was announced. Our consistent message has been that our investment managers are positioned a little more defensively than they otherwise would have been pending the result of the Referendum. Even if, as has happened, the vote is to leave the EU, negativity will be cushioned by the defensive positioning, weaker Sterling will benefit some overseas holdings and gilt exposure will receive a short-term boost. Over time, there may also be additional opportunities within the portfolios for our managers to take advantage of because of the more defensive cash positioning which, again, should serve to enhance clients’ long-term portfolios.

Currency

The value of Sterling has fallen significantly against all major currencies. The Treasury and the Bank of England are well prepared for this and have engaged in extensive contingency planning.

The capital requirements of our banks are now ten times higher than before the crisis, and they have been stress tested against scenarios more severe than the country currently faces. The Bank of England is also able to provide substantial liquidity in foreign currency, if required.

Stock Markets

As expected, the stock market reacted poorly initially with the FTSE 100 opening at 5765, although it rebounded by mid-morning to 6000 – 6100. The international nature of the UK stock market should be remembered. Many companies listed on the London Stock Exchange are not driven by whether or not the UK remains in the EU. Indeed, the weakness of Sterling is likely to see the reported profits of such companies increase and, importantly, their dividends.

European equities will also be volatile in the short-term, as the UK’s departure also affects the EU. There may well be similar referenda on EU membership in other EU countries, and speculation may increase over a break-up.

Other Assets

The classic safe haven assets – the Yen, the US Dollar, US Treasuries and gold – have all rallied sharply.

What Should Clients Expect?

Nestor’s clients’ portfolios should be reasonably well-insulated from the turmoil in the markets this morning. Equity allocations will be impacted negatively, that much is certain – although there is currently a rally from the opening position of the FTSE 100.

Allocations towards US Treasuries and Gilts will have done well this morning, outweighing any drawdown from riskier bond allocations. Gold has also been a beneficiary of the market turmoil.

The real strength we see is with foreign currency exposure in portfolios, which should counterbalance almost all of the negative equity contribution.

This underweight to Sterling has been a consistent theme for all of Nestor’s strategic investment partners in the run-up to the Referendum – sacrificing potential upside for downside protection looks to have been a well-judged idea.

Finally, the more cautiously managed portfolios are overweight in cash, which acts as a final stabiliser for the portfolios.

Should you wish to speak to a Director, please do not hesitate to contact us on 0161 763 4800.

Please click on the links below for fund manager specific commentary:-
7IM
Tilney
Brewin Dolphin
Close Brothers
Liontrust
Quilter Cheviot