Investment Commentary Q2 2016

 July 19, 2016
 
Global equity markets have experienced a great deal of volatility over the past quarter. However, they have, at least for now, recovered from the initial sharp falls following the UK’s referendum on Europe. We discussed Brexit in more detail in our previous releases after the outcome was known on 24th June.

There would appear to be some way to go before we are able to talk authoritatively about what the real implications of the new relationship will be.  Until then, people will remain nervous and speculation will continue to be rife.

From an investment perspective, it is difficult to look into the future with any great certainty. However, one thing that is pretty certain is that the next move in UK interest rates will be down rather than up, with the MPC looking as though they will reduce rates at their next meeting in August, possibly down to 0.25%. The MPC are – wisely in our opinion – waiting to see more data in July after the Brexit result before making any rate announcements. The UK has had interest rates at 0.5% since March 2009, and during this period, economists have predicted that rates would rise on many occasions and as far back as 2011. We have never subscribed to this theory and it is quite possible rates will be “lower for even longer” and reach 10 years or more before rising, making life very difficult for those relying on interest from cash deposits. Investing in income-producing assets continues to be the best investment strategy, in our opinion.

The European situation is about much more than just the UK.  It is difficult to see how Europe, itself, will not escape unscathed.  The problems in Europe beyond Brexit, with Greece still troubled and also now Italy being drawn into investors spotlights, mean that care needs to be taken when investing into the area. Our most frequently used European fund, Blackrock Continental European Income, has risen by 12.9% over the past year, which is 8% higher than the peer group, according to FE Analytics as at 15th July.

We still see value in other sectors that have a much lower exposure to the fall-out of the UK referendum, such as the United States and Asia for example. The United States is still the main driver for Global Markets accounting for approximately 25% of Global Gross Domestic Product (GGDP).

We are also continuing to monitor our clients’ exposure to Asia and are comfortable with the current levels, with an example of a fund that we recommend, Schroder Asian Income, rising by 17.1% over the past year, against the sector average of 13.0%.

In summary, we are constantly monitoring the fast moving political events that have dominated global markets recently. We continue to prioritise asset classes that have predictable strong income streams in what is a very low interest rate world, and it would appear that low global interest rates are going to be around for a long period to come.

Brexit has clearly caused some problems, not least the suspension of some UK commercial property funds, but overall our clients’ portfolios have risen since the referendum result, highlighting the importance of investing in a diversified portfolio.