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As I write this at midday on Friday June 24th, the stock market has recovered some of its poise. Financial stocks that were 25% – 30% down at the market open have recovered somewhat to be only down 20%. The FTSE 100 opened down 8% and is now about 4.5% down. The markets have been expecting a “remain” vote all week and have been profoundly shocked by the unexpected “leave” vote. Sterling has had the biggest problems as on Thursday, with “remain” seemingly winning, at one-point sterling hit $1.50, however overnight as the results came in it fell as low as $1.35 and it currently stands at $1.38.

Whilst the UK has been growing relatively strongly compared to many of our European neighbours, growth has still been anaemic and the shock of the result will probably mean the UK will enter a recession. Anecdotally, the second quarter of 2016 (April 1 to June 30) has been slow. Talking to many managers they report that their underlying companies have been cautious with future investment, with the view that these companies will start spending and investing again. The pick-up will probably be slow leading to a weak third quarter, as well as possibly triggering a recession (two quarters of negative growth is the technical definition of a recession). Whilst the Bank of England have few triggers available to them, a cut in the official base rate from 0.5% to 0.25% or even lower is now a strong possibility. Their next meeting is in a few weeks, however emergency action may well be taken to pre-empt and stimulate growth.

Whilst a shock fall in the currency isn’t ideal if you are about to head off on holiday, the impact of a weak sterling on the stock market, companies and your portfolio is more nuanced cialis in deutschland. For those invested in overseas assets, a fall in the value of sterling actually increases the value of your overseas investments. Today’s fall versus the dollar for example gives a degree of insulation from a possible fall in the US markets. This shows the benefits of having a globally diversified portfolio and not just a UK focused one.    Another pertinent determinant is the effect is on UK dividends. 2016 was potentially a weak year for dividends, however many companies declare their dividends in US dollars (HSBC and Astra Zeneca for example) and again, a fall in sterling increases the value of those dividends for UK investors. One final point on a weak sterling is that it makes exports cheaper, giving a fillip to many UK based manufacturing firms – we are world leaders in many sectors and this could be vital in the next few years.

Returning to my earlier point, the trajectory of rates in the UK is probably down now and not up. Many commentators, including me, thought that the US would increase rates again in 2016, possibly as early as July, however I cannot now see this happening.

As Neil Woodford (one of the UK’s best known fund managers) put it recently, the UK’s long term economic future should be largely unaffected by Brexit. Negotiations are clearly going to be tough both within the EU and also other nations, but countries aren’t simply going to stop trading with us. However, it is fair to say that the long term outlook is difficult to predict with the biggest potential concern in my view a possible disintegration of the EU.

One more long term factor to consider is the UK’s ability to self-finance the budget deficit. Thus far, we have been seen as a safe haven with global investors happy to bankroll the annual multi-billion-pound deficit, however with political instability and uncertainty the UK may have to pay a higher rate of interest to tempt investors, thus pushing back the time frame for having a balanced budget.

There isn’t a simple answer to this. The price falls in some areas, especially financials have left some stocks looking very cheap. However, the most important thing to remember with investing is that it is for the long term and short-termism is not conducive to long term profits. There is also little point selling after the event. The UK market is very well diversified globally with an estimated 70% of earnings coming from overseas. Even if the UK has a tough few years, companies can still prosper.

Ben Yearsley June 2016

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