Financial services firms and asset managers have reacted to the UK’s vote to exit the European Union with predictions of market volatility, but a generally positive long-term outlook.
After 52 percent of voters opted for a ‘Brexit’, the British pound saw its sharpest drop in history and the FTSE 100 dropped by over £128 billion. Prime Minister David Cameron has resigned, and will stand down in October.
The UK is yet to activate Article 50 of the Lisbon Treaty, which will begin the two-year process of withdrawal from the EU.
Mark Pugh, UK asset management leader at PwC, suggested that market volatility will be a concern for asset managers, saying: “The concern is particularly pressing as it impacts the value of the very product itself.”
“Some listed UK asset managers will be worried about the combined impact of volatility on their own share price alongside the impact on the value of the assets in their funds.”
He added: “Hand in hand with this will be liquidity concerns for funds, especially if there is a run of outflows over a long period of time with no market correction. Regulators have been focused on liquidity risk for some time and the asset management industry should already have stress tested for this outcome but those who prove unequal to the task can expect scrutiny.”
However, Ian Powell, chairman and senior partner at PwC, maintained that, although business confidence could be affected by the market uncertainly, “history has taught us that UK business is adaptable and innovative when confronted with new challenges and opportunities”.
Nigel Green, founder and CEO of financial advisor deVere Group, called the result “a victory for uncertainty across international financial markets”, adding: “The world’s currencies, equities and bonds are now on magical mystery tour - at least in the short-term.”
However, Green also noted that there could be opportunities for investors. He said: “They will, understandably, be seeking high quality equities, amongst other assets, that have become cheaper so that they might top up their portfolios and/or take advantage of lower entry points, which means greater potential returns.”
“In these times of increased volatility, more than ever a good fund manager will prove to be invaluable to help capitalise on the enormous opportunities that will be coming along and help to sidestep the risks.”
While Mark Carney, governor of the Bank of England, has reassured the industry that the UK financial system is strong enough to cope with the volatility of a ‘Brexit’, he also acknowledged: “It will take some time for the UK to establish new relationships with Europe and the rest of the world. Some market and economic volatility can be expected as this process unfolds.”
Giordano Lombardo, CEO of Pioneer Investments, also noted the challenges around passporting, saying: “While certainly there will be much work to be done by the government and the EU institutions to agree ‘passporting’ arrangements between the UK and Europe in the coming months (and years, even), we believe this process will be successfully resolved as long as all stakeholders maintain the proper focus on the client.”
The Pensions and Lifetime Association have issued a statement calling it “essential” for the UK and Brussels to act quickly with negotiations, Naomi Heaton, CEO of London Central Portfolio, suggested that London real estate could benefit from a background of volatile markets.
This tentative positivity comes despite the immediate market reaction to the unexpected result. The UK lost its status as the fifth-largest economy to France, sue to the rapidly falling value of the pound.
The UK also lost its highly valuable AAA credit rating, with ratings agency Moody's becoming the first to cut the UK from its highest rating, to Aa1.
In a statement on the decision, Moody’s explained: “The immediate financial market reaction has been pronounced, with sterling depreciating sharply and global equity markets falling.”
“Heightened uncertainty during negotiations over new arrangements between the UK and the EU will likely dent investment inflows and consumer and business confidence in the UK, weighing on its growth prospects.”
