EU Referendum – Don’t Panic

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July 18, 2016

EU Referendum – Don’t Panic

Our Managing Director Paul Northmore reviews the commentary received following the UK’s decision to leave the EU.

The people of the UKhave voted to leave the European Union.
Not only is this is major financial decision for the country but this will also have wider implications for markets globally.
We have already seen an expected change with the value of the pound plunging but the message to our clients is ‘Don’t Panic’.

We have received articles today from Investment commentators.

It is still early days to comment confidently on the financial situation we will find ourselves in as we exit, but we are assured that the UK economy can handle this transition.

Neil Woodford has dismissed fears over the impact of the decision, concluding the long-term economic future of the country will be unaffected by the vote.

Bank of England –  ‘We are well prepared for this’

The Bank of England says it expects market volatility after the Brexit vote but that the UKeconomy can handle it.

Speaking at a press conference, Bank of England governor Mark Carney says: “Inevitably, there will be a period of uncertainty and adjustment following this result.
There will be no initial change in the way our people can travel, in the way our goods can move or the way our services can be sold.
And it will take some time for the United Kingdomto establish new relationships with Europe and the rest of the world.”

Carney added the Bank expects “some market and economic volatility” as those new relationships are struck.

He added: “But we are well prepared for this.  The Treasury and the Bank of England have engaged in extensive contingency planning and the Chancellor and I have been in close contact, including through the night and this morning.
The Bank will not hesitate to take additional measures as required as those markets adjust and the UKeconomy moves forward.”

What happens next?

The vote to leave followed by David Cameron’s announcement that he will resign before October’s Conservative Party Conference, sets in motion a process that will trigger Article 50 of the Lisbon Treaty, the formal mechanism for withdrawal from the EU. Unless a withdrawal agreement is reached earlier, this will start a two year period of negotiation. During that time the UKwill still be a member of the EU and bound by its rules and treaties.

So what does this all mean for your finances?

 

Mortgages

With regards to mortgages it really could go either way.
It’s possible that the Bank of England may consider raising interest rates to counteract the reducing value of the pound, with the Treasury forecasting a rise between 0.7% and 1.1% in borrowing costs which David Cameron claimed may see increase of up to £1000 per year.
However in the case of a severe shock to the UK economy, the Bank of England might have to consider reducing rates. In which case, the cost of lending could fall.

House prices

According to the BBC The International Monetary Fund (IMF) has warned that Brexit could cause a sharp drop in house prices. This was on the expectation that the cost of mortgages would rise.

The Treasury has said house prices could be hit by between 10% and 18% over the next two years, compared to where they otherwise would have been. This would be good news for first-time buyers, but not so great for existing homeowners.

These projections would be incorrect if the Bank of England were forced to cut interest rates.

Pensions

In the short term we are told that Brexit is unlikely to have a significant impact on the UKpension plans. However, it will give the opportunity for the UK legislation to deviate from EU requirements in the future.

In the build up to the referendum the prime minister said that a Brexit would threatened the ‘triple lock’ for state pensions – the agreement by which pensions increase by at least the level of earnings, inflation or 2.5% every year.

Investments and Savings

The investment platform Hargreaves Lansdown has told its clients that it is impossible to know the long-term economic implications of Brexit on investments.
“We cannot assume an ‘Out’ vote will be bad for the long-term prospects of the stock market” it said.

UKshares may become less attractive to foreign investors and would therefore decline in value.  However shares may rise with company profits and with the pound weakening, exporters may benefit so the value of shares could rise.

It really is too early to say exactly what will happen.  Changes are already taking place as we write.  Please rest assured that we are keeping our eyes firmly on developments in order to advise you on your finances.

If you would like to discuss your situation please contact your adviser by email or by calling the Manning and Company office on 01752 837950 or for Anthony Trueman and Co 01822 859368.

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