UK Elections: Currency and stock markets taken by surprise - Fidelity

Paras Anand, Head of European Equities at Fidelity International, comments that the vote by the UK electorate to leave the EU has certainly taken both the currency markets and stock markets by surprise.

Key Quotes

“It is important to recognise the scale of moves that we are seeing are in context to a strong performance both by Sterling and by UK markets over the last week. Whilst the result will lead to political uncertainty which may lead to shorter term volatility in the markets, it is important to remember that such events impact the long term prospects of companies only at the margin.

The consequence of the vote on the UK domestic economy and Europe more broadly is difficult to call and will likely only be evident over time but the fall in the currency increases the competitiveness of those sectors exporting both goods and services internationally and should increase the appetite for inward investment over time.  If we look at the corporate sector in particular, we are in an environment where companies are holding significant cash balances and the scope for ongoing corporate activity remains. This should limit the extent of the falls that we should see over the coming weeks and months.

“What we are doing today is no different to last week which is using the opportunities that arise from these short term macro-economic events to focus on companies that we want to own for the longer term. The Pan-European corporate sector is truly international in nature.  If you look at the US corporate sector, it very much faces off the domestic economy; the Asian corporate sector likewise earned 60% of its revenues and profits from the Asian region. Compare that to the Pan European corporate sector which is much more broadly based.

So even in a scenario which the vote to leave has a negative impact on demand in the UK and Europe to a greater extent than we currently believe, it will not at the aggregate level dominate the prospects for companies as much as some might believe.”