Last Friday we heard the news we had all been expecting. The referendum on whether or not the UK should remain in the European Union will be held this June. On 23rd of June to be precise.
You are probably fed up with reading arguments about why we should remain in Europe or why we should leave. Relax! I am not going to express an opinion on that either way. What I do want to do is make you ready for the possible effects on your clients’ portfolios.
David Cameron has referred to this referendum as a “once in a generation decision”. The implications could be huge. We have been in the European Union now for many years. Leaving it would be a step into the unknown. On the other hand, voting to stay in the European Union would also be a change. It would signal greater co-operation with our European partners could be on the cards. Either way, whether we leave or we stay, there could be some major changes, and we don’t really know what those changes might be.
The financial markets do not like uncertainty. In the lead up to the referendum we are therefore likely to see a lot of volatility. Quite possibly there will be an overall downward pressure. Not just in the FTSE, but also in other major markets, including Europe and the US.
Perhaps you think I am over stating the case. After all, there was not a great deal of movement in the markets after the Friday announcement. Apart, that is, from a bit of a shake-up in the currency markets. But share prices do not seem to have fluctuated any more than they have been doing recently anyway.
That is true. The markets knew it was likely the announcement would be made. As I said at the beginning, this was the news we had all been expecting. Any uncertainty arising from this was already factored in to the prices on the markets, which is why we have not seen major reactions to the news.
Where we are likely to see more concern about uncertainty, and therefore greater volatility, is in the next few months leading up to the referendum. Big names on both sides in the debate will no doubt make impressive speeches and write full reports on why they think we should leave or why they think we should stay. Some of these will not be a surprise, but there will probably be a few jokers in the pack, and we should expect movements both up and down when that happens.
After the referendum, the effect on markets could go either way no matter which way the vote goes. But, again because of the inherent uncertainty of the consequences of leaving, a vote to leave the European Union could well see a significant drop in share values in the UK, Europe, and even in the US. Not because the markets will necessarily think that leaving the European Union would be bad for our economy, but simply because it will create a lot of unknowns and uncertainty. What will happen long term is anybody’s guess, but the short term result could impact quite negatively on investment values.
Please note this is not a political piece. I am not arguing the merits of leaving or staying in the European Union, but just indicating that we should be ready for some possible big swings in share values.
Those swings will then be reflected in one way or another in our client portfolios. Be ready for clients to come to you for reassurance, and also be ready for the possible impact if you rely heavily on fees from money under management.