By Business & Finance 
By Vincent McCarthy, head of Investment Consulting at Invesco
Sacré bleu! Hearts are breaking across Europe, as the European establishment has been jolted by the surprise result that Britain has voted to leave.
As one might expect the initial reaction has been an emotional one, the innate fight-or-flight response of market participants has been activated, with a sense of panic pervading markets this morning.
In a speech on June 17th in Vienna, Christine Lagarde said: “It has been said that ‘it takes great courage to see the world in all its tainted glory, and still to love it’. So I wish bon courage to our fellow Europeans from the United Kingdom!”
I remember reading the speech thinking that, if anything, it would strengthen support for the leave campaign. It is the type of patronising rhetoric from the establishment that the average individual has had enough of.
Not quite ‘let them eat cake’ but I am sure those Britons who have seen little improvement in their personal circumstances over the last seven years don’t care to be reminded about how Europe has transformed Britain for the better.
Personally, I thought Britain would stay, based on the fear of the unknown dominating voters’ minds. “What Britons have under the current system will outweigh the uncertainty and inability to quantify the economic and social consequences that comes with a free and independent Britain,” said Lagarde.
The fact that over half of the 33 million people who cast their vote chose to embrace the unknown speaks volumes of how they view the current system.
Leave voters will be castigated for their ‘stupidity’ by their fellow citizens on the ‘remain’ side, but there is bravery in voting for change. Either that or they feel they have nothing to lose.
While we have seen markets react sharply since the result was announced, how the relationship ends will determine the impact of Brexit longer term.
Britain may have voted to leave, but they have a vested interest in ensuring Europe does not fall apart
Breakups are never easy and there are all sorts of theories on how long it takes to get over a breakup. Where love is involved, one theory is that it can take half the number of years you were in the relationship to recover from the breakup.
We are talking about countries when we consider Brexit, but still the interdependence between Britain and the European Union has been fostered over decades so this split will not be easy on either party. A long drawn out breakup can be expected to unfold.
The irony is that in most breakups the advice is typically to cut all contact. However, Britain and Europe now need to work closer than ever to avoid a wider collapse of the European Union.
Britain may have voted to leave, but they have a vested interest in ensuring Europe does not fall apart. Likewise, while the Europeans may feel bitterness towards Britain, it is only by working with them to deliver a smooth exit, and can they ensure that the wider Union does not disintegrate.
Common sense will need to prevail on both sides if they are to avoid a bitter end to this relationship.
In 2008 sterling was nearing parity against the euro. In 2011 it was around the £0.90 level when the Bank of England’s (BOE) policies were more aggressive than the European Central Bank (ECB).
Then Mario Draghi and the European Central Bank upped their monetary policy game and weakened the Euro (currency wars). The single currency hit £0.70 in 2015 as market participants expected the Bank of England to begin raising rates while the ECB were becoming more aggressive (so-called monetary divergence theme). However, the Bank of England shifted gear and warned that rates hikes would not be happening anytime soon, which set the stage for weaker sterling.
Brexit has no doubt weighed on sterling in recent months, but relative policy being pursued by central banks has been the dominant factor in currency markets since the 2008 financial crisis.
STEP INTO THE UNKNOWN
Financial markets in the short term are driven largely by speculation. The Brexit move has added to uncertainty for companies, but that is the nature of business. Take Ryanair, for example, the stock is currently down -14.44%.
Are people really going to stop flying? Is Michael O’Leary going to stop getting up in the morning with the sole goal of cutting costs and making money? The answer is a simple one, no! Buying equity of a company like Ryanair is about taking a stake in the long-term future of a business, the earning potential of that company. The best companies adjust to their market environment; a long-term investor should be asking where Ryanair will be 10 years from now.
It is the uncertainty around the terms of the breakup is the biggest risk, so there is a huge amount of responsibility on the elected officials to act decisively to allay fears
‘If you are driving to work and you think this doesn’t affect you, it has. Your pension has taken a big hit,’ was what I heard from one radio presenter. This is a broad sweeping statement. While equities have fallen, core government bonds have maintained their safe haven status, delivering positive returns. Diversified funds will have fallen a lot less than equities.
I have continued to emphasise that the most important thing for members of a pension scheme is to align oneself to the most appropriate fund given one’s willingness and ability to take risk, time to retirement and overall retirement goal.
If I make it to retirement, I’ll be looking at 2050 when I take my retirement savings pot from my pension scheme. For me, the current market sell-off is just short-term noise. The key point is that I have 34 years to maximise my contributions. But also I get to invest my contributions at lower prices, which for me is a good thing. For instance I would rather buy Ryanair at €11.50 per share than €13.50 per share.
Having said that, someone nearer retirement cannot stomach this type of volatility or a sustained drawdown, hence why this type of member should have a lower allocation to equities.
THERE GOES THE FEAR
It is the uncertainty around the terms of the breakup is the biggest risk, so there is a huge amount of responsibility on the elected officials to act decisively to allay fears. As well, the elections in Ireland and other countries should be a wake up call for governments around the world that large groups of people feel left behind by the current system, which has seen wealth and power become more and more concentrated.
For individuals planning for retirement, what is most important is maximising your contributions to meet your retirement goals, and aligning to the most appropriate fund. Don’t be swayed by the fear gripping headlines.
Photo (above): Andrew_Writer
About the blogger
Vincent McCarthy is the head of Investment Consulting at Invesco, responsible for all aspects of investment strategy for defined benefit and defined contribution pension schemes.
He provides clients with bespoke advice on asset allocation, investment selection and risk management.
McCarthy has previously held roles with Merrill Lynch in the US, Davy and IFG Ireland, advising and managing money for high net worth individuals and corporate clients.
He graduated from the University of Limerick with a 1.1 Honours Business degree in 2003, majoring in Economics and Finance.
He also completed a Masters in Finance at Fairfield University, Connecticut after being awarded the Fr John Conlisk scholarship. He is also a CFA Charterholder and a qualified financial advisor.
You can find him on Twitter, or view his personal blog.
