The EU referendum took place on June 23rd with over 33 million UK citizens voting for the UK to either remain in or leave the European Union. The result went against forecasts made by polls and bookmakers as the Leave campaign was victorious with a vote of 51.9%. Global markets were shocked by the result. The MSCI World index was down -4.90% by the end of the day. The FTSE 100 index plunged -8.4% upon opening on Friday morning, before going on to recover most of that over the course of the day. The most significant movement was that of the pound, which was worth $1.50 at 11pm on 23rd June but had fallen to less than $1.35 a few hours later.
The political world was also shaken by the outcome. David Cameron announced on Friday morning that he would be resigning as Prime Minister within the next few months. Former London mayor Boris Johnson, who led the Leave campaign, revealed he would not be standing to become the new Conservative leader. Labour Leader Jeremy Corbyn, having sacked the Shadow Foreign Secretary Hilary Benn, was inundated with resignation letters from members of his Shadow Cabinet, and by Monday night two thirds of them had gone. Nigel Farage, who hailed June 23rd as the UK’s ‘Independence Day’ once the result became clear, has since stepped down as leader of the UK Independence Party.
In the wake of the referendum, rating agency Standard & Poor’s downgraded the UK’s credit rating from AAA to AA, and forecast that the result would lead to ‘a deterioration in the UK’s economic performance’. Meanwhile, at the time of writing, an official petition calling for a second EU referendum has received over four million signatures.
Despite the Brexit result, UK large-cap companies provided a positive return last month, as the FTSE 100 index rose +4.72%. Smaller companies were less resilient, with the FTSE 250 (ex IT) index slipping -6.02% and the FTSE Small Cap (ex IT) index dropping -5.30%. In the US, the S&P 500 index finished the month with a minimal gain of +0.26% European equities were hit hard by the result, with the Eurostoxx 50 index diving -6.07%. However it was Japan which saw the biggest declines, as the Topix 100 index hurtled down -9.59%.
Emerging market returns were less affected by the referendum result. The MSCI EM (Emerging Markets) index saw an increase of +1.69%. Chinese equities, represented by the MSCI China index, gained +1.13% while Latin American equities, measured by the MSCI EM Latin America GR index, grew +4.31%. Indian equity returns were also positive, as the IISL Nifty index gathered +1.56%.
Bond returns were mostly positive. UK government bonds in particular saw huge returns; the FTSE Gilts All Stocks index rose +5.63% while long dated (over 15 years to maturity) gilts surged +10.25%. In the corporate market, European corporate bonds, measured by the Markit iBoxx Euro Corporates index, returned +0.99% and sterling denominated corporate bonds, measured by the Markit iBoxx Sterling Corporates index, improved by +2.52%. High yield returns on the other hand were negative, as the Bank of America Merrill Lynch Euro High Yield index and the Bank of America Merrill Lynch Sterling High Yield index declined by -0.34% and -1.08% respectively. Emerging Market sovereign debt, measured by the JP Morgan EMBI Global index, lifted +3.73%.
Commodities had a very mixed month. The S&P GSCI index, which consists of a basket of commodities including oil, metals and agricultural items, stayed fairly flat at +0.08%, while Brent blend oil, measured by the Oil Price Brent Crude PR index, moved just -0.02%. However the precious metals saw enormous gains, as the S&P GSCI Gold and Silver indices surged by +8.49% and +16.12% respectively. Meanwhile the agricultural markets plummeted, as corn and wheat fell -10.14% and -6.31% respectively.
In the foreign exchange markets, the pound had one of its worst months on record. All of the major currencies appreciated significantly against the pound, including the US dollar (+8.88%), the euro (8.66%) and the yen (+17.70%).
James Timpson CFA, BSc (Hons), IMC
(All the above returns are reflected on a local currency basis i.e. they do not factor in any relevant currency movements. Unless accompanied by PR (Price Return), they do include income).
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