Brexit: initial thoughts

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Neil Woodford 24 June 2016 Est. reading: 3 min read

The people of Britain have voted to leave the European Union. This clearly represents a very significant decision for the UK, for the European Union and indeed for the wider global economy. Markets are clearly shocked by the decision but, in our view, it is not as negative a development as the market’s initial reaction appears to imply.

We have been clear in our thinking on the economic implications of Brexit for some time. The independent report that we commissioned on the subject (if you haven’t read it, please do, particularly if you need reassuring on what this decision is likely to mean for the economy), concluded that Britain’s long-term economic future would be largely unaffected by a decision to leave the European Union. We stand by these conclusions.

That is not to say there won’t be challenges in the near-term. There will. We now face a period of uncertainty as the exact terms of Britain’s exit from Europe are negotiated. Financial markets loathe uncertainty as amply demonstrated by this morning’s reaction across all asset classes.

On this momentous day, it is worth reminding our clients of a few important things. On the 20 February 2016, when David Cameron announced that the EU referendum would take place, the FTSE 100 index was at 5950, the 10 year Gilt yield stood at 1.41% and the sterling / dollar exchange rate was 1.44. Since then the equity market has risen 6.5% but that rally has been quite narrow, being led by oils (+15%), and the mining sector (+18%). Banks have performed well too, up just under 10%, with pharma flat, tobacco up 7%, utilities up 4% and general retail up 5%1.

Clearly, on a day like this, markets have responded negatively to the uncertainty that follows this vote, and may continue to do so for some while. However, my job is to peer through this short-term uncertainty and focus on the long-term fundamentals of the economy and the businesses in which we invest.

As I have said on a number of occasions recently, the global economic backdrop will continue to be challenging, regardless of our membership of the EU. Many of the greatest economic challenges that we face now and in the future, in my view, dwarf the economic issues associated with today’s outcome.

Nevertheless, in the near-term it is likely that UK GDP will be lower over the next 18 months or so than if we had voted to remain. But, because inflation will (temporarily) be higher following the fall in the pound, nominal GDP could well be little changed. Growth in consumer cash flow will be marginally lower, principally because fuel prices will be higher but of course exporters will enjoy something of a windfall.

In the longer term, it is my view that the trajectory of the UK economy, and more importantly the world economy, will not be influenced significantly by today’s outcome. Consequently, the portfolio strategy will not change. It was designed for a challenging world, characterised by low growth, deflation, debt problems, weak productivity and troubling demographics. Despite these headwinds, I remain confident that the portfolio will deliver the returns we have targeted over the three-to-five year time horizon that we continue to focus on.

Although market conditions such as these can be unsettling, we would strongly urge investors to look through this period of uncertainty and focus on the long-term opportunity which, in our view, continues to remain attractive.

What happens next? Neil gives his long-term views here…

What are the risks?

  • The value of the fund and any income from it may go down as well as up, so you may get back less than you invested
  • Past performance cannot be relied upon as a guide to future performance
  • The annual management charge is charged to capital, so the income of the fund may be higher but capital growth may be restricted or capital may be eroded
  • The fund may invest in other transferable securities, money market instruments, warrants, collective investment schemes and deposits
  • The fund may invest in overseas securities and be exposed to currencies other than pound sterling
  • The fund may invest in unquoted securities, which may be less liquid and more difficult to realise than publicly traded securities

Important information

Before investing, you should read the Key Investor Information Document (KIID) for the fund, and the Prospectus which, along with our terms and conditions, can be obtained from the downloads page or from our registered office. If you have a financial adviser, you should seek their advice before investing. Woodford Investment Management Ltd is not authorised to provide investment advice.

Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct Authority (firm reference number 745433). Incorporated in England and Wales, company number 10118169. Registered address 9400 Garsington Road, Oxford OX4 2HN.

Woodford Patient Capital Trust plc is incorporated in England and Wales, company number 09405653. Registered as an investment company under section 833 of the Companies Act 2006. Registered address Beaufort House, 51 New North Road, Exeter, EX4 4EP.

The Woodford Funds (Ireland) ICAV (the “Fund”) has appointed as Swiss Representative Oligo Swiss Fund Services SA, Av. Villamont 17, 1005 Lausanne, Switzerland. The Fund’s Swiss paying agent is Neue Helvetische Bank AG. All fund documentation including, Prospectus, Key Investor Information Documents, Instrument of Incorporation and financial reports may be obtained free of charge from the Swiss Representative in Lausanne. The place of performance and jurisdiction for all shares distributed in or from Switzerland is at the registered office of the Swiss Representative. Fund prices can be found at www.fundinfo.com.

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