When the London stock exchange closed on Thursday June the 23rd, the day of the referendum, the FTSE 100 price index was at 6338. However, by the 27th of June, just 3 days after the result of the referendum had been revealed, the FTSE 100 had fallen to an index of 5982, indicating that many investors had sold equities as a result of the economic uncertainty due to the referendum result. The FTSE 100 fell by 5.74%. The surrounding uncertainty about the UK’s economy and its performance caused a fall in the majority of markets as investors sold their shares at cheaper prices in the short time after the referendum, however this did cause a sudden rise in the demand and hence the price for gold as many investors looked for a safer investment. As gold prices rose by 22% in the UK, many large firms fell in value; both the Royal Bank of Scotland and Barclays fell in value by 32% and 25.1% respectively between the 24th and 27th of June. On the other hand, a fall in the value of many of these top 100 businesses may not be a key indication of the long term impact of the UK’s exit from the EU.
The FTSE mid 250 registered its biggest two-day loss since 1987, down nearly 14 per cent. The drop in the FTSE 250 was much greater than the FTSE 100, reflecting the greater diversification of the companies of the FTSE 100 as lots of their revenue comes from other countries, meaning they benefit from a depreciation of the pound.
As the UK is the first major country to leave the European Union, there is major uncertainty over the state of the economy and how it will be affected. With lots of uncertainty means that investors may decide to increase their cash holdings in order to reduce their risk due to the high volatility in the market.
The value of the pound fell dramatically in the short hours after the referendum, despite a slight rise in the run up to the vote with the market suggesting that the Remain campaign had won. However, as the demand for the pound falls due to the economic uncertainty and hence lack of investment within the UK economy, the value falls. The strength of Sterling is a key indication of the performance of the UK economy, however the sudden depreciation of the pound on the day of the referendum was more likely to just be an indication of the huge uncertainty of the UK economy and for many investors. On the day of the vote, when the markets closed the pound-dollar exchange rate was £1.00-$1.49 however when the markets closed the day after, the exchange rate had fallen to £1.00-$1.37.
With an 8.1% fall in the value of the pound relative to the dollar over 24 hours, this caused overseas bonds and equities to rise in value whereas UK shares went down. Therefore many UK investors are swapping UK shares for overseas shares to increase their gain and make the most of the exchange rate, but they are also preferring absolute return funds due to the current economic uncertainty. The exchange rate has decreased the price of UK exports, increasing the number of injections into the UK economy and improving our balance of trade on the current account, however it has also caused a rise in the price of imported goods. As a result, this will increase the cost of production for many UK firms causing greater inflation.