Investment Update July 2016: Brexit, Terrorism & US Interest Rates

If 2015 was eventful, the start of 2016 took this to another level entirely.  The first half of the year was book-ended by extreme bouts of market volatility the likes of which we haven’t seen for some time.

Concerns of a slowdown in China at the start of the year and the United Kingdom’s (UK) decision to leave the European Union (EU) at the end of June, led to large swings for most global markets.

Slowdown in China and US Interest Rates

As well as concerns of a slowdown in China the markets’ sell off in January and February was also driven by the possibility of a rise in US interest rates. 

It is feared that this ‘normalisation’ of monetary policy by the US Federal Reserve (Fed) would affect the strength of the dollar and lead to the withdrawal of liquidity from global financial markets, especially in emerging economies.

These two key economic transitions led many equity markets to fall more than 10% by mid February. Since then Chinese authorities have carried out combined monetary and fiscal stimulus, and the likelihood of a rise in US interest rates is more remote following the Fed’s chairwoman, Janet Yellen, promising to pay more attention to global factors when setting policy.

Brexit

June then saw the UK vote to leave the EU, a decision which sent a wave of uncertainty through UK and European markets – and markets hate uncertainty.

Brexit has led to a significant weakening in the pound, which is bad news for firms importing goods from abroad.

That said three-quarters of the UK’s top 100 companies generate their revenues and earnings overseas so a fall in sterling provides both a boost to exporters and an immediate translation gain.  This has resulted in the FTSE 100 rising since the referendum.

Remarkably, given the turbulence experienced at the start of the year global equities have delivered a positive return to investors in the first six months of the year. 

In addition, Government Bonds have provided returns well beyond most investors’ expectations and they continue to offer more than just insurance within portfolios. 

Related reading: “Investment after Brexit: What to do with your money”

Indeed, a sterling-based investor who looks at portfolio valuations only twice a year and who managed to avoid the more sensational media commentary will have seen acceptable gains for their diversified portfolio over the six months to the end of June.  They wouldn’t be blamed for wondering what all the fuss is about!

Our portfolios are invested across a range of asset classes, sectors and geographical markets and this diversification has led them to continue to provide a smoother journey for our clients during volatile times.  In the first half of the year our lowest risk portfolio delivered over 4% whilst our highest risk portfolio ended the period over 13% higher (on a total return basis, assuming reinvested income).

What about the future?

Whilst it seems that markets are resilient and central banks are willing to “do whatever it takes” to support them, there remain a number of threats to this status quo and complacency should be avoided.

Investors still seem to be struggling to have faith in the strength of the global recovery.  It seems investors will require strong evidence for a prolonged period to accept that a sustainable recovery is under way.

Terrorism

One cannot ignore the increasing incidence of terrorist attacks either.  Whilst the evidence from such events over the last decade suggest that negative market effects are temporary, a series of co-ordinated attacks in several major cities would potentially further sap confidence and is another reason to avoid being too complacent in the short term.

Short term volatility can create opportunity.  However, it remains really important to retain investment discipline. 

Trying to time portfolio changes in reaction to the latest news is impossible.  Keeping a cool head and maintaining discipline whilst never forgetting what your long term objectives are, is the key to long term investing.

Equities and bonds

With sentiment and confidence so fragile, we can expect to continue to see equity market volatility in the coming months. 

Related reading: “Investment management: Should I sell at the peaks and buy back at the troughs?”

That said opportunities are available for equity investors whilst bonds will continue to offer unexciting returns but will act as a much needed ‘insurance policy’ if the global recovery stalls. We continue to believe they should hold a place within a well diversified portfolio.

Other assets

We continue to like the long term diversification benefits Global Real Estate offers through bricks and mortar commercial property funds, notwithstanding the recent issues experienced for many UK funds. 

We also maintain an allocation to multi-asset, multi-strategy funds that have the potential to deliver positive returns across all market conditions.  These strategies offer further diversification and non correlation benefits to our portfolios.

Diversification remains crucial

It is impossible to pick the next big winner year after year so we believe it is really important to hold a well balanced, diversified portfolio of investments.

 

This post was written by Steven McGregor, Chartered Wealth Manager for Price Bailey’s Discretionary Portfolio Service. Steven helps clients to gain exposure to the stock market via risk rated portfolios. You can contact him at steven.mcgregor@pricebailey.co.uk.

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