Ahead of the referendum, the markets had priced in the fact that the UK would vote to remain a member of the EU. As a result, the FTSE 100, which consists of the 100 largest companies on the London stock exchange, has slumped by 6.4 percent this morning. By way of comparison, the German DAX index, consisting of the 30 largest companies on the Frankfurt stock exchange, fell by 7.9 percent.
"The result was largely unexpected, as evidenced by the market reaction," says Portfolio Manager and Trader in SKAGEN Global, Chris Tommy Simonsen. "The markets are even more jittery now than they were before the referendum," he adds.
It is not just the stock market that is feeling the effects of the unexpected result. The uncertainty is reflected in the bond market.
The yield on the British 10-year government bond has today fallen 34 basis points to 1 percent. By comparison, the German 10-year policy rate has fallen 20 basis points to -0.1 percent. In the currency market, most currencies have lost terrain to the US dollar, amongst others. The pound sterling is down 8.1 percent while the euro is down 2.8 percent.
The graph illustrates how the markets have reacted to the news that the UK is leaving the EU. Gold has strengthened while the stock markets and currencies have plummeted.
Possible contagion?
Many investors are now seeking refuge in what are perceived to be safer investments, fearing that the results of the British referendum will have a contagion effect. One large point of uncertainty is what effect Brexit will have on other countries in the EU. If politicians in other countries start to discuss similar options for their nations, it could put the future of the European Union in danger.
"That is one of the things that concerns me most. The financial markets don't like uncertainty. The central banks will start working hard now to try to stabilise the markets," says Jane Tvedt, portfolio manager of the bond fund SKAGEN Tellus.
Limited direct exposure
The falling stock and bond markets are expected to have some impact on SKAGEN's funds, although the funds' direct exposure to the UK was limited as of the end of the day yesterday.
Prior to the referendum, the equity fund SKAGEN Global had the greatest exposure with 7.5 percent of the portfolio invested there. In SKAGEN m2, the weighting was 2.8 percent, while in SKAGEN Focus it was around 2 percent. Neither SKAGEN Kon-Tiki nor SKAGEN Vekst had any direct exposure to the UK.
Looking at exposure to Europe as a whole, these figures increase somewhat.
As of yesterday SKAGEN Global had a total of 17 percent of its assets in euro countries. SKAGEN m2 had 22 percent invested in the euro area, while for SKAGEN Focus the corresponding figure was 20 percent. SKAGEN Kon-Tiki had only 0.8 percent of its assets invested in the euro countries.
The bond funds SKAGEN Avkastning and SKAGEN Tellus did not have any direct exposure to the UK, but a total of 16 percent and 33 percent of their assets are invested in the euro area, respectively.
"We are of course seeing significant fluctuations today. However, even though the markets may be driven by emotions in the short term, in the long run it will be the fundamental factors such as economic growth and return on capital that count," says Leif Ola Rød, CEO and acting Investment Director in SKAGEN.