Neil Woodford's wisdom on Brexit

It was close, but Britain yesterday voted to relinquish its 40-year membership of the European Union (EU). There was carnage on stockmarkets first thing Friday and sterling plunged to levels not seen since the mid-1980s. It would be easy to panic, but fund manager Neil Woodford is keeping his cool.

"This clearly represents a very significant decision for the UK, for the European Union and indeed for the wider global economy," admitted Woodford in a blog early Friday.

"Markets are clearly shocked by the decision but, in our view, it is not as negative a development as the market's initial reaction appears to imply."

We'd already reported recently that Woodford believes there are bigger concerns affecting the global economy than Brexit. He talked of a "complex coalition of linked challenges" such as excessive government and consumer debt, excessive corporate debt in China, excess capacity and deflation, rapidly ageing demographics, very weak productivity growth, and a lack of investment.

An independent report commissioned by Woodford several months ago concluded that Britain's long-term economic future would be largely unaffected by a decision to leave the EU. "We stand by these conclusions," Woodford said Friday.

"Many of the greatest economic challenges that we face now and in the future, in my view, dwarf the economic issues associated with today's outcome."

Of course, he's not downplaying the challenges near-term. While the result is now known, there'll be a new period of uncertainty as the terms of our exit are negotiated over the next few years.

But Woodford reminds us that on 20 February, when David Cameron announced that the EU referendum would take place, the FTSE 100 index was at 5,950, the 10-year Gilt yield stood at 1.41% and the sterling/dollar exchange rate was 1.44.

"Since then the equity market has risen 6.5% but that rally has been quite narrow, being led by oils (+15%), and the mining sector (+18%)," points out Woodford. "Banks have performed well too, up just under 10%, with pharma flat, tobacco up 7%, utilities up 4% and general retail up 5%.

"In the near-term it is likely that UK GDP will be lower over the next 18 months or so than if we had voted to remain. But, because inflation will (temporarily) be higher following the fall in the pound, nominal GDP could well be little changed. Growth in consumer cash flow will be marginally lower, principally because fuel prices will be higher but of course exporters will enjoy something of a windfall."

Longer term, he thinks the trajectory of both the UK and global economy will not be influenced significantly by today's outcome.

"Although market conditions such as these can be unsettling, we would strongly urge investors to look through this period of uncertainty and focus on the long-term opportunity which, in our view, continues to remain attractive."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser