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Charles Hepworth on the UK's decision to leave the EU

Friday, June 24, 2016

Charles Hepworth, Investment Director at GAM, comments on the UK's decision to leave the European Union (EU)


  • Sterling to weaken considerably
  • European equity markets to come under severe pressure
  • UK fixed income market faces prospect of spiralling increase in current account deficit
  • US Fed rate policy decisions and US election pose bigger risks to markets


The UK's decision to leave the EU has come as a surprise, given recent polls. We now expect sterling to weaken considerably to nearer parity against the euro and the 1.20 region against the dollar.

Looking at the UK equity market, we expect some reasonably large declines in prices of between 15-20% over the next few months. UK growth downgrades of up to an annualised 1% drop in GDP over the next decade is highly likely, with the greatest impacts being seen over the next few years. European equity markets will also come under severe pressure on the perceived fracturing of the EU. Should UK equity exposure be required for specific client mandates, then relative safety could be found in the larger cap end of the market, but expect mid and smaller-cap companies to come under significant pressure. A risk-off mode to European equities in general would be the most prudent option at this time.

The fixed income market in the UK will now have to deal with the prospect of a spiralling increase in the current account deficit. The Bank of England will have to be seen to be proactive in rate cutting to nearer 0% in the face of an imminent recession and will have to step in to ensure a liquid orderly market as many foreign investors will no doubt be exiting in droves. This referendum result will be highly inflationary due to a huge sterling depreciation and along with falling growth, we could well be entering a stagflationary environment.

Whilst this is a poor outcome for investors in general, the potentially bigger risks from the US in relation to Fed rate policy decisions and the US election warrant a retreat from high equity engagement levels we have been maintaining up to now. Capital preservation mode is the order of the day, month and quarters to come, which will see us move more to gold and other safe-haven assets and cut our UK-based earners almost completely from the funds in favour of more global revenue streams.



Important legal information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development.
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