The UK electorate has voted to leave the European Union in a once in a generation vote. We believe the likely implications are:

• Other than Greenland, which left the European Union in 1985, there is no precedent for a country withdrawing membership. This raises a constitutional crisis for the entire EU project. The Spanish elections will test the anti-establishment mood this weekend in Europe and, further out,we have an Italian referendum in October 2016, French elections in 2017 and German elections 2017.
• As evidenced by Mark Carney’s speech today,theUK government and the Bank of England will be proactive to support growth. A meaningfully weaker sterling may help to counter some of these negative forces longer term. It should be remembered that Euro zone growth has been stable,but it is low at 1.7%year-on-year and there is very little room for error.
• Central banks across the globe will be proactive and will take all necessary co ordinated policy actions to stabilise financial markets.However,the risk of more policy dislocation between markets has increased and there will be increasing questions about the effectiveness of these policy responses.
• Overall, in coming months there will be more uncertainty for investors.

Since the beginning of this year, we have been reducing risk in our portfolios to reflect concerns about a number of issues, including Brexit, and we have entered this period with higher levels of cash. In light of the current environment, some of the actions that we are considering are to:

1. Reduce exposure to European equities. The euro currency has been resilient, which in the short term should help to mitigate potential market losses for sterling investors, but we are very aware of the on going political risk in Europe.
2. UK listed property developers have fallen by as much as 30% this week and this plus the sharp fall in sterling could stimulate international investor flows in to this market.
3. Potentially add to Fed-sensitive assets such as US treasuries and emerging market sovereign debt (denominated in US dollar), as we expect the Fed to remain dovish.
4. Re-orientate our existing UK exposure in to large-caps. These are multinational companies with significant international earnings and should benefit from a weaker sterling.