In the weeks leading up to the Brexit vote, the changing sentiment towards a leave vote saw the UK equity market weaken, with GCC investors fleeing towards safe havens. It is almost inevitable that this sell-off will continue as we enter a period of extreme volatility and uncertainty. We could see markets over-react in the short-term, followed by a snap-back as investors digest the news.
As history has shown, usually the right thing to do – and often the hardest thing for an investor to do – is avoid the temptation to change their portfolio and sell when prices are already depressed. Other international markets may also be affected by the risk of contagion from the leave vote, but exactly how this might materialise remains to be seen.
What we do know is that the UK’s EU membership referendum needs to be seen in the context of other macro events and risks such as the US presidential election and the future trajectory of US monetary policy.
We have already seen currency being impacted significantly and the Pound could drop as low as $1.2-1.25 as sterling-denominated assets lose some of their allure. The ‘Leave’ vote paves the way for a period of political and economic uncertainty, which we expect to have a negative impact on UK growth, not helped by a huge twin deficit (current account and budget deficit). This in turn should see the pound weaken beyond the initial reaction to the Referendum results as the Bank of England is expected to loosen policy, potentially cutting interest rates in the near future.
With the Dirham pegged to the dollar GCC based investors could see their currency strengthen in value with 4.5 Dirhams per Pound not inconceivable.