Predications by UK Chancellor George Osborne that a Brexit vote would be one for the world’s first ‘DIY recession’, is set to become a reality and drive UK equity markets down, according to Richard Buxton, head of UK equities and chief executive, Old Mutual Global Investors.
Buxton, a keen commentator on the EU referendum and one of the City’s most respected fund managers said that he was, like many, surprised by the result.
“We had expected the result of the vote to be close, but our conviction was nevertheless that the status quo would prevail,” he said. “The biggest sadness of today is that it is reasonable to assume that the UK will quickly enter a period of economic recession, the key reason why we believed the outcome would be different from what has materialised today.
“It is, in effect, likely to be the first ever “DIY recession”, as George Osborne prophetically called it.”
As for the immediate reaction in markets, Buxton pointed that the oil price declined immediately by around 5% as the likely result of the vote became clear, suggesting expectations for a marked decline in global demand.
Other early indicators, he said, included declines in the Australian, Hong Kong and Japanese equity markets, which were still in session as the results were being announced.
UK – ‘bleakest of all’
But Buxton believes that the prospects for domestically focused UK businesses are “clearly, the bleakest of all”. FTSE multinationals will, on a relative basis, he says, “almost certainly perform better than their domestically oriented peers”, as the weaker pound will support overseas earnings when translated back into sterling.
Nevertheless, investors should now brace themselves for an “unpleasant period of relatively indiscriminate selling as funds aim to meet redemptions”, due to conditions where liquidity may be more limited than usual, says Buxton. He also predicts a “real possibility” that the UK result could also contribute to tipping the US economy into recession.
‘Two years of uncertainty’
Looking further ahead, Buxton says that it now seems “inevitable” that the UK and European economies will face a period of two years of uncertainty, as the UK attempts to negotiate how to extricate itself from the European Union, while maintaining access to European markets.
“During this period of uncertainty, inward investment is likely to remain at best muted, as both international and UK businesses consider their options for future capital expenditure and hiring,” said Buxton.
“The result, in our view, also has potentially very serious implications for the future of the European Union itself; a break-up of the broader union has today become a distinctly greater possibility, and we would not be surprised to see amplified calls from, for example, the Netherlands, Sweden and Denmark to leave the EU.”
“Meanwhile, the result of the vote in Scotland shows a very different picture from that of England, with voters north of the border choosing resoundingly to remain in the EU. As such, the likelihood of a break-up of the United Kingdom has increased significantly,” he added.
Within equity markets, as ever at times of market stress, Buxton said that emotional reactions will mean that “price falls will overshoot; this is the very nature of stock markets”.
“The gold price was one of a very small number of bright spots as the result became clear; it immediately broke convincingly through the US$1,300/oz barrier, as investors looked for safe havens,” he said.
Buxton summarised by saying that he was personally disappointed at the result, which is likely to result in a difficult period for UK equity investors. But added that, “as ever, we will do everything in our power to help our clients to navigate these market conditions.”