Wealth managers and their clients waking up to the EU referendum result this morning are facing their worst case scenario in terms of the investment landscape. Sterling has hit its lowest level since 1985 and global markets are in freefall after the UK voted to leave the EU by 52% to 48%.
This was not the result markets were expecting with UK assets staging a relief rally up until polls closed, on the view the ‘remain' campaign had done enough to secure victory. However, unlike last year's general election, this time around the polls proved far more indicative of the final result as too close to predict.
Perhaps what the City failed to acknowledge, as economic leaders laid out their compelling arguments to remain in the EU, was the groundswell of opinion in other parts of the country to leave the bloc.
Here, issues such as immigration and freedom to govern have outweighed even the risks of the UK potentially falling into a recession following a Brexit vote.
'Brexit effect'
Failure by the markets this week to acknowledge the referendum result as too close to call will undoubtedly add to the ‘Brexit effect' which will hit today's trading.
As we head into unchartered waters, the next few hours will be alarming for investors with the pound set to drop further and futures markets pointing to a 6% slump for the FTSE 100 and other global equity markets.
Undoubtedly, the markets will be reacting not just to the uncertainty an exit vote will bring, but the significant longer-term ramifications for the UK economy, with stark warnings ahead of the referendum that a ‘leave' vote could even plunge the country back into recession.
Domestically-focused mid- and small-cap names are likely to be the worst hit in the short-term, with the financials sector in the eye of the storm, while further moves will be made into safe haven assets including gilts, treasuries, the yen and gold.
All eyes will now be on the Bank of England to take the necessary actions to stabilise the situation and calm markets. Governor Mark Carney has previously said there is room within the monetary policy toolbox to boost growth through "conventional or unconventional tools", but the central bank's job will not be an easy one.
As head of Barings Multi Asset Group Marino Valensise highlights, a significant currency depreciation would be highly inflationary.
"In turn, this would present the Bank of England with a particular dilemma; whether to raise interest rates to control inflation and risk slowing the UK economy, or do nothing, look through and see inflation rise by as much as 4% or 5%."
Weather the storm
However, these decisions are likely to be for the weeks and months ahead and require a more measured response. Negotiating the turbulence in the days ahead will be a priority for political and economic leaders. It is also a time for wealth managers to reassure clients that the UK can weather this storm.
Speaking before the referendum, Invesco Perpetual equity income fund manager Mark Barnett said: "In the short term, there is likely to be an economic pause or interruption because it will create a level of uncertainty which we have not seen before. We would be in unchartered waters.
"But over the long term, I think the UK can cope with whatever outcome we are presented with because we have a dynamic economy, which has adapted to change before and can adapt to whatever is thrown at us now."
Parallels may be drawn with the worst days of the financial crisis as markets go into freefall, but this is clearly a very different situation; driven by political upheaval rather than a global banking crisis which brought the financial system to its knees.
For those able to stomach the volatility, the coming days and weeks should also provide investment opportunities and allow active fund managers to really show their mettle.
Click here for our gallery of eight fund managers who could weather the Brexit storm, and here for the investment trusts set to benefit from a 'leave' vote.
