Choppy investment waters ahead
UK equities shrug off Brexit vote.
Strategies suited to choppy trading find favour.
Alarms sounded over low interest rates and inflation.
Volatility in financial markets tipped to remain.
Featuring this month’s experts:
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Looking ahead to March, pre-emptive portfolio positioning is top of the agenda as the Brexit referendum comes into view, along with depressed interest rates and commodity prices.
What Brexit might mean for the UK
Richard Carter, Fixed Income Specialist at Quilter Cheviot, says:
With the EU referendum now confirmed for 23 June, the stage is set for four months of debate about what Brexit would mean for the UK.
In terms of the market impact, the clear loser from the uncertainty is sterling. The currency has already seen a sharp reaction, dipping below 1.40 versus the US dollar. Further falls are likely if the polls are close, with some investment banks forecasting 1.15 versus the dollar if Brexit were to happen.
The impact on gilts so far has been limited and that will probably remain the case for the time being. The truth is Brexit is only one of many factors driving bond markets, with worries over China and a slowing global economy being the more dominant concerns. In terms of possible bond market hedges though, index-linked gilts could do quite well if Brexit happens because a sharp fall in sterling will almost certainly give a strong boost to inflation.
UK equities have so far reacted with a shrug, which makes perfect sense. While some domestic companies may be adversely affected, a large part of the FTSE 100 is made up of international businesses which receive much revenue from overseas and in foreign currency. Sterling weakness may be an advantage for them as it will increase the funds available to pay dividends – an important topic in equity markets at the moment.
Fixed Income Specialist at Quilter Cheviot
Multi-Asset investing in Choppy waters
David Cooke, Investment Manager at Saltus Investment Managers, says:
When the mood is this risk averse, investors worry more about return of capital than return oncapital. The lessons from the past suggest to us that these distortions can present as many opportunities as threats for the patient investor and that we should remain as alert to money-making opportunities as we do to downside risks.
Expectations for a weak start economically to 2016 have been forecast for many months. The risks are real, but they are also known and increasingly priced into securities.
As real return, risk-based, multi-asset managers, we will continue with the strategy of researching and identifying new opportunities, whilst keeping portfolios broadly diversified across a wide range of investments – reducing our chances of tying returns to any one particular style or geography.
We would expect to be keeping cash levels reasonably high (around 15-17%) and will also trim some existing positions and recycle monies into managers with more “go anywhere” type mandates within their specialist area of expertise. Our intention with this is to tilt investments towards styles more suited to navigating choppy trading environments.
Investment Manager at Saltus Investment Managers
Back to 1993: Brexit’s first fruit?
Giles Rowe, Chief Executive and Chief Investment Officer at Henderson Rowe, says:
Has Brexit already yielded its first fruit? Policymakers everywhere are moving heaven and earth to make their currencies as cheap as possible. Sterling fell 3% in the week the referendum was announced – a free gift!
To be fair, this is part of a decline that has been in place since June 2014 and may be ending. Since then, British goods and services have become 18% cheaper in US dollar terms, and 12% in euro terms.
But dangers lurk. Britain’s trade deficit is dominated by manufactured imports, offset by service exports. If we leave the EU it will be relatively straightforward to negotiate trade deals under WTO rules on the former, but tougher when it comes to services.
Will the regular sterling crises of pre-Thatcher Britain return to haunt us if we leave the EU, exacerbated by the flight of financial services to Europe? For investors with internationally-diversified portfolios, non-sterling assets have been a welcome buffer against equity weakness. A good general rule for investing when doom rules the headlines has been to politely ignore them, but look for opportunities. Brexit is not our base case, but the US dollar’s rise has been nice.
Chief Executive and Chief Investment Officer at Henderson Rowe
Position for profit, as well as defence
Lee Goggin, Co-Founder of findaWEALTHMANAGER.com, says:
The pros and cons of Brexit will be debated to death in the coming months. The Leave campaign seemingly has its work cut out at present, but recent polls have been poor indicators looking back at the Scottish referendum and General Election.
The UK remains a large and well-developed industrial and economic power, and a significant importer from other EU countries like Germany, France and Italy. Remaining within the EU or sitting outside is unlikely to alter our attraction as a rich importing nation to these and other countries as trade is always a two-way street.
While sterling could come under further pressure, it is good to see stock market levels holding up quite well. Of course, while the old adage about buying low and selling high is always a good rule of thumb, it is harder in practice. It is only after the event that we ponder why we didn’t look at buying stocks when they dropped in price. Hindsight is always 20:20.
We’ve seen a significant increase in the number of people coming to our site to seek advice as the Brexit debate has started to heat up. Positioning your portfolio to weather the worst of any coming storm will help you sleep better at night. But a professional can help you uncover profitable investment opportunities that are likely to emerge amid the uncertainty too.
Co-Founder of findaWEALTHMANAGER.com
Beware the implications of low interest rates and inflation
Jonathan Marriott, Chief Investment Officer at Vestra Wealth, says:
Interest rate expectations changed significantly over February, with a far slower pace of tightening now expected. The December Fed meeting saw the first “normalisation” move, however the futures market is now showing that UK/US rate rise expectations have moved out by as much as 18 months since the start of 2016. Our view, now supported by the futures market, remains that inflation will stay low and low interest rates persist.
Given interest rates and lending conditions have driven this year’s economic concerns, it unsurprising the financial sector has been hit hardest. Investors fear future profitability will be hit should deposit rates fall further, or indeed move into negative territory. This is significant for global equity indices as banks make up around 10% of the total. Bank loans made to troubled energy and commodity-related companies, as well as declines in the high-yield credit market, have hurt sentiment, particularly in the US.
Banks are seen as barometers of economic stability, and the recent events which have depressed their share prices are having a similar negative effect on growth expectations.
A similar perception is true when looking at oil, but we suspect the price is a less useful economic growth indicator than previously. Should the depressed oil price be a function of over-supply, and not due to a weakening of demand, it could be largely unrelated to global growth expectations. Our view remains that a low oil price will act like a tax cut for consumers in many developed markets and be economically positive longer-term.
Chief Investment Officer at Vestra Wealth
Brace for more volatile times ahead
Chris Bates, Strategist at Smith & Williamson, says:
The volatility in financial markets is likely to remain. Equity markets continue to be dictated by swings in the price of oil, although prices appear to be finding a floor. It has been encouraging to see that fears over China appear to be easing and our view remains that although the Chinese economy is likely grow at a slower pace, the worst is probably behind us. However, the key risk continues to come from any further heavy-handed policy moves by the Chinese authorities.
Focus will be on Mario Draghi [President of the European Central Bank] in March, although he’ll have to go above and beyond to reignite markets. As QE in its current form has lost some of its power, markets are sceptical whether global central banks have the ammunition and willingness to deliver self-sustaining recoveries in economic growth, as well as their ability to combat deflationary headwinds. Concerns have now crept in over the potential impact of negative interest rates.
Recession fears, particularly over the US economy, look overdone in our opinion. Economic data and leading indicators over the coming months will provide a better gauge of whether the global economy is on firmer ground and whether any equity market rally can be sustained.
Strategist at Smith & Williamson
The investment strategy explanations contained in this piece are for informational purposes only, represent the views of individual institutions, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment decisions.
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