This morning George Osborne, Chancellor of the Exchequer, issued a statement seeking to reassure the financial markets after the country voted to leave the EU last Thursday.
This end to his silence follows a weekend of high political drama domestically, in which the race to find a replacement leader for the Conservative Party began. Jeremy Corbyn’s Labour shadow cabinet imploded, while a breakup of the UK entered the realm of possibility as the SNP’s Nicola Sturgeon sought both a second referendum on Scottish independence and a block on EU withdrawal entirely. Mixed messages emerged from European officials and politicians over engagement with the UK, ranging from outright hostility (Jean Claude Juncker) to constructive (Angela Merkel).
Against this backdrop, George Osborne’s statement marks a significant and necessary shift from the ‘end is nigh’ tone he used during the campaign (which suggested a decision to leave would wreck the economy and an emergency Budget would be required, with tax hikes, spending cuts and likely higher interest rates) to a much more measured stance.
Today Osborne stated that the economy “is about as strong as it could be to confront the challenge our country faces” and that there is no need to act hastily in terms of any measures that might be required with respect to the public finances. In essence this was confirmation that a so-called ‘punishment Budget’ in the near term is off the cards. If anything, letting the dust settle on the immediate shock could conclude that pro-growth measures such as cuts in corporation tax might be an appropriate way to signal to businesses globally that the UK remains a very attractive place to do business.
The Bank of England has already made clear that it is willing to provide whatever liquidity is necessary, and expectations of a rate cut are increasingly growing. A possible further round of quantitative easing can’t be ruled out either.
Keep a cool head amid uncertainty
There is no doubt that these are unnerving times and we are now in for a prolonged period of political and economic uncertainty, with periods of market volatility likely. After all there are other big issues looming over global markets, including concerns about China’s credit bubble and slowdown, weak global growth and the limits of monetary policy.
But we think it’s time for investors to keep a cool head, focus on the long term and retain a bias to funds that concentrate on liquid, high-quality companies with strong and visible cashflow generation and international earnings. While some sectors such as financials and property are going to be impacted by ongoing uncertainty as the UK’s future relationship with the EU is fleshed out, throughout the referendum debate we have consistently pointed out that over 70% of FTSE 100 earnings are made outside the UK, providing some cushion to any near-term weakness in UK growth. As these typically dollar-based earnings are repatriated in sterling profits and dividends, the weaker pound should actually provide a boost.
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