The dive in stock markets and sterling in the immediate aftermath of the EU referendum was as unsurprising as it was alarming.
But what happens next? With the UK remaining in the EU for at least two more years while negotiations take place, the long-term picture is very unclear. The implications of the vote to leave are already being felt, however, from the impact of the uncertainty on investment and housing markets to the speculation over the decisions the Bank of England will take over the coming months.
The referendum has raised more questions than it answered. Here are just some of those being asked by households in Scotland wondering what it might mean for their finances:
I’m going overseas on holiday next month. Should I hold off buying my currency?
Currency market volatility is such that sterling could either rise or fall this week, so there’s no clear answer. If you’re buying euros you should probably hold off as long as you can. In some cases buying currency at all could be difficult, with Thomas Cook among the firms to suspend its online currency sales in the early hours of Friday morning.
Some foreign exchange companies decided to stop offering rates over the weekend in the hope that rates stabilise when markets open tomorrow morning.
If you’re planning an overseas holiday but haven’t yet decided where you’re going you could save a significant amount of money by choosing a destination where sterling is strong and the cost of living is low, said Andrew Brown, of Post Office Travel Money. “For those who have not yet booked their holiday but are planning to travel abroad during the summer or later in the year, it will be well worth doing some homework before making a decision.”
Most of my savings are in stocks and shares Isas. Should I be worried about what’s happening?
If you’re investing for a retirement that’s still a few years away you’ve got time to ride out short-term volatility. Keep in mind that you’re investing for the long term and make sure your portfolio is diversified across different asset classes. Avoid making knee-jerk decisions such as selling your holdings when the market is falling.
“Investors need to remember that, in the short run, markets over-emphasise the importance of current events whilst they barely register over the long run as markets revert back to fundamentals,” said Adrian Lowcock, head of investing at AXA Wealth.
“Investors need to look through all the noise and remain focused on their personal goals. Any sell-off will produce opportunities for prudent investors looking at the big picture and focused on the longer term.”
I’m relying on my drawdown fund for my pension income.
What should I do?
If your fund is largely in equities this will leave you vulnerable to “pound cost ravaging”, which is what happens when the same level of income continues to be withdrawn even as the fund value is falling.
Taking less income from your pension while markets are falling would be sensible. Alternatively, take it from the natural yield provided by any dividends (from equities) or interest (from fixed income) that you can access.
Will my state pension be affected?
Not immediately, but the triple-lock on state pensions, which means they rise each year by whichever is highest out of earnings growth, inflation or 2.5 per cent, is under threat.
David Cameron suggested during the referendum campaign that the policy would come under review in the event of a Leave vote.
“This assertion was made on the basis that the economy would take a downturn and that public spending might not be able to sustain the expense of this policy,” said Tom McPhail of Hargreaves Lansdown.
“The state pension is expensive, costing around £90 billion a year; it is a very big slice of the DWP budget so any changes to the state pension could involve substantial saving.”
But Steve Webb, director of policy at Royal London and pensions minister in the coalition government, argued that “it would be odd for a government to prioritise a cut which would affect the most powerful voting bloc in the country”.
I’ve heard predictions of a house price crash in England. What about the market in Scotland?
The main impact in Scotland will be on the level of activity rather than on prices, believes John Boyle, head of research at Rettie & Co.
“It is worth noting that, even with an international financial crisis and precipitous economic recession over 2008-9, house prices remained relatively stable, but transaction activity dropped back considerably,” he said. “This fall in activity was largely a result of the drying-up of financial liquidity, but the UK financial system is now on much more solid ground and has been stress tested against scenarios more severe than the current situation.”
Transactions will fall in the short term as people work through the implications of the result, he added.
But confidence in Scotland’s housing market won’t be significantly affected, said Robert Carroll, managing director of MOV8 Real Estate. “The vast majority of property buyers in Scotland are from Scotland, most often moving only a few miles from their previous location, so the market remains quite insular. Barring wider, surprise economic consequences, any reluctance of EU nationals to purchase property in Scotland should have a relatively small effect across the vast majority of property sellers.”
Will my mortgage become more expensive?
If you’re on a tracker mortgage you’re now at the mercy of any interest rate hike that follows the plunge in sterling. The good news is that few people expect interest rates to go up even if inflation rises, with the Bank of England wary of slow global economic growth.
Some economists believe the Bank of England may even cut rates to zero which, allied to a fall in gilt yields (which reduces the cost to lenders of long-term funding), could drive fixed rate mortgage rates even lower.
“Most mortgage lenders did not pass on much of the pre-referendum reductions in rates so we can now expect to see a bit more price competition, especially in the longer term fixed rates.” said Ray Boulger, senior technical manager at John Charcol.
The uncertainty surrounding the next move in the base rate – if any – means there’s little case for making borrowing decisions on the basis of the referendum outcome.