Andy Coleman, Managing Director Retail, assesses investment tactics as negotiations for the UK’s departure from the EU begin.
So the starting gun has been fired. Article 50 of the Lisbon Treaty has been triggered and the negotiations on the terms of the UK’s exit from the European Union now begin in earnest.
The event is monumental historically and politically. But in investments terms, it has been a bit of a damp squib, with little immediate discernible response from markets. This is partly because negative sentiment has been factored into markets – most notably in a falling pound. But also because so much is so unclear, that no one wants to predict at this stage who are going to be the winners and losers in the protracted process of negotiations that lie ahead.
But there are some predictions we can make with some confidence:
1. Volatility in the pound is likely to a be a feature of the next two years – Trade negotiations are likely to be a case of one step forward, one step back. However the talks progress, it’s the pound that will be the most sensitive barometer of how the world perceives things are going. We could potentially see quite a rollercoaster in sterling values. The big question is what that might mean for interest rates, inflation and wages.
2. Markets won’t like uncertainty – Of course they never do. But pervasive uncertainty may stop UK equity markets from following any clear trend for the next few years. Uncertainty could also lead to a dampening in capital market activity. UK IPO volumes for the start of 2017 are already reported to be sharply down at a time when issuance activity has jumped sharply elsewhere – and such slowdowns can have a knock-on effect in secondary markets.
3. Consumer spending is likely to bear the brunt of any rise in inflation – Markets are already braced for a weaker pound to feed through to inflation as manufacturers and retailers factor rising import costs into their own prices. Some commentators are anticipating inflation to increase from 2.3% to more than 3% this year. Given that the UK savings ratio is at a record low, the only option for most households faced with shrinking disposable income is to cut back on spending, which could be bad news for consumer stocks and UK growth generally.
But it’s important to be mindful that people have made lots of doom and gloom predictions since the Brexit vote and been wrong. For the past year, the UK stock market has been unexpectedly resilient – primarily thanks to exporters and manufacturers being more competitive abroad. For the same reasons, the economy has also been stronger than many expected, with GDP for Q4 2016 revised upwards from 0.6% to 0.7%. Plus all these events are happening against a backdrop of recovery in global growth, which could help provide additional support to the UK economy for many months to come.
So the main mantra for anyone trying to position an investment portfolio in these hard-to-call times is to be prepared for anything. Here are some potential ways to help client portfolios remain resilient in a post-Article 50 world.