Posted on: 28 July 2016
As with all aftershocks in the aftermath of a tectonic shift, there is unpredictability. The UK’s decision to leave the EU last month has triggered a swathe of speculation on the future of markets and currencies, as well as inflation. Indeed last week’s Purchasing Managers’ Index (PMI) for July has suggested UK economic activity has suffered its sharpest fall since 2009. In this edition of The Commentary we examine the economic changes seen in the last month, as well as the opportunities a post-Brexit UK has brought for wealth management portfolios.
Actively managing portfolios in a low interest rate environment
Last week’s PMI survey was eagerly awaited by market economists and journalists following Brexit. It tracks activity in the manufacturing and services sector and - surprisingly to most commentators - revealed a drop in activity to 47.7 in July from 52.4 in June. A reading below 50 indicates economic activity is contracting.
Given these figures it does seem more than likely now that the Bank of England (BoE) will seek to lower interest rates when its Monetary Policy Committee (MPC) meets in early August.
A change in fiscal policy however is not just going to be the preserve of the UK this summer. The Bank of Japan (BoJ) is also expected to provide a stimulus for the Japanese economy when it meets on 28 July. The BoJ Governor Haruhiko Kuroda has denied ‘helicopter money’ will be used to combat any impending deflation, but some stimuli may be introduced by the Bank on 28 July. With a significant rise in the value of the dollar and better US economic data, it has also been suggested that the Federal Reserve may look to raise its interest rates in the second half of the year.
Traditionally summer is a quiet time in the markets. Asset allocations have seen little activity, due not just to Brexit but also to the low volumes of deals happening. We are therefore not inclined to make significant changes to portfolios in the short-term, while the economic backdrop is so uncertain. Things should, however, become clearer later on this year and we will keep our market strategy under constant review, making changes if required.
What does a fall in sterling mean for client holdings?
We have had many questions from clients about what a fall in sterling will mean for their investments in overseas holdings. In the short-term, this is positive with assets denominated in other countries worth more. Big UK international companies will be beneficiaries as a large proportion of their income comes from abroad. UK exporters should also benefit as their goods are cheaper on international markets.
Before Brexit, consumer price inflation increased to 0.5 per cent in the year to June. We are likely to see this go up, and with the fall in sterling – and no significant wage increases on the horizon - it could make it trickier times for UK citizens. The fear for workers is that the vote to leave the EU has pulled the rug from under sterling, putting pressure on import prices as well as a fresh squeeze on household incomes.
Seeking diversity to combat inflation
From a portfolio management perspective, we seek diversity across our investment class range to combat inflation. Companies with pricing power can be inflation proof investments as they look to pass on higher costs to consumers without significantly slashing their volumes.
As a safe haven, gold has provided some inflation protection over the medium term, as well as being a good portfolio diversifier.
Conventional policy would be to increase interest rates to head off any impending inflation. However, that is now a very unlikely move given the BoE will seek monetary easing to combat the economic negativity from last week’s PMI figures.
Further clarity expected in Q4
We are monitoring events closely and assessing the broader implication for market economies. Last week’s PMI data may have been seen as a blow for the UK, but we will have to wait until Q4 to see the full picture post-Brexit.
Through our long-term prudent investment philosophy and active management approach, we will seek out investment opportunities resulting from any short-term volatility and will continuously review portfolio holdings and our asset allocation strategies on behalf of clients.
All data has been compiled by Duncan Lawrie from sources believed to be reliable. Full details of sources are available on request.
The comments and figures in this document are generally applicable but you should always take specific advice to suit your individual circumstances before taking any action. Errors and omissions excepted.
The value of investments and income generated may fall as well as rise, and investors may not get back the amount invested. Past performance is not a reliable indicator of future results.