We have yet to see official economic data for the weeks following the referendum on 23 June, however Q2 data showed robust consumer spending and industrial output numbers and economic forecasters have become more optimistic regarding the UK’s outlook. In addition, the new Chancellor, Philip Hammond, has dismissed the need for an ‘emergency budget’ which was discussed by his predecessor, George Osborne.
Concerns will no doubt remain over continental European economies as a series of referendums might be on the cards should the UK exit the EU successfully. As a result, we are cautious over continental European markets and the single currency.
The gold price has risen nearly 30% since the start of 2016 as global economic concerns persist and investors seek a safe haven, at a time when other financial assets appear to offer little value on a risk adjusted basis.
Since Brexit, economic stimulus has been implemented by the Governor of the Bank of England, Mark Carney. Interest rates have been cut in half to 0.25% and £70bn of quantitative easing has been injected into the economy in an attempt to fend off a potential slowdown. This has had a significant impact on financial markets.
The global economic backdrop of benign growth and low inflation and interest rate expectations has pushed bond yields to historic lows. For example, the yield on 10 year UK gilts is currently hovering at around 0.5%. These low yields have been forcing investors to seek alternative income producing assets and, consequently, to take on greater inherent risk. Accordingly, this has inflated the price of defensive equities known as ‘bond proxies’, as well as alternative assets such as infrastructure.
Since the vote to leave the EU, returns on the FTSE 100 and FTSE 250 have been approx. 13% and 11% respectively. The gain made by the FTSE 100 has been helped by weak sterling. The majority of its constituents’ earnings are generated overseas, which have become inflated when translated back into sterling. The strong performance of the FTSE 250 has been due to the domestic stimulus measures put in place to support the economy and financial markets.
The immediate aftermath saw sterling weaken significantly. Sterling has fallen approx. 12% and 11% against the dollar and euro respectively. Arguably, this should give a greater stimulus to the UK economy than a 0.25% interest rate cut. A change in interest rates typically takes around nine months to take effect on the economy, however the fall in sterling instantly boosts the competitiveness of UK exports and supports GDP growth, potentially offsetting a slowdown in business confidence.
Sentiment over UK property was on a knife edge on 23 June. As a result of Brexit, there was immediate heightened uncertainty over the property market, especially London. Rapid flows out of property investment vehicles led to the suspension of trading and they are yet to reopen. Meanwhile, fund managers have been building up a cash pile to accommodate possible large outflows once they reopen.
There will continue to be political and economic uncertainty over when the UK will officially leave the EU, the new relationship we form, as well as a potential second Scottish referendum. In our view, this is likely to be reflected by volatile financial markets in the short term.
It is important not to neglect wider global economic issues such as China’s slowdown, US interest rate hikes and high levels of public and private debt in a low growth and low inflation environment, all of which, in or view, are likely to have more profound long term effects on the UK economy and financial markets.
Please note, this does not constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch.