While the EU referendum result may now be known, there is still very little that’s certain about what happens next. We don’t know when we will leave the EU or what our relationship with the EU will look like once we do. We also don’t know who our political leaders will be through this process.
In times of uncertainty, stock markets tend to be volatile. Prices depend to a great extent on investor sentiment, and when opinion about what’s likely for the future keeps changing or can’t be agreed upon stocks can go up and down in value rapidly. Market volatility is perhaps then the only reasonably certain outcome of the referendum result in the short term. This can feel unsettling for investors, as the value of their ISAs and personal pensions may change notably from day to day. However, this is not an unexpected part of being invested and valuations seen in these circumstances are not generally indicative of long term returns.
Stock markets tend to ‘price in’ investors’ thoughts and concerns for the future. For example house builders and financial services fell sharply after the referendum result as investors rapidly ‘priced in’ the possibility of a recession. However, any slowdown in the UK economy might not be that bad or might not affect all companies equally. Professional investors such as fund managers therefore tend to see market falls as buying opportunities. Where they identify companies that have been caught up in stock market falls but are still fundamentally strong, they will take advantage of being able to buy at a lower price.
What is likely to happen next, then, is that in the short term markets will react strongly to any news, suggestions and speculation about our exit from the EU, resulting in volatility. However, this is not all bad as it can create opportunities for active investors.
In the medium term, as the terms of the UK’s ongoing relationship with the EU are agreed markets should settle as this will allow for a more considered analysis of the impact on the UK economy and valuation of company shares.
In the long term, research commissioned by Woodford Investment Management found that Britain’s economic future would ultimately be largely unaffected by a decision to leave the European Union.
If you are wondering whether there are any changes you should make to your portfolio following the referendum result see our separate article ‘Do You Need to Take Any Action with Your Investments Following the ‘Leave’ Result?’