Second Quarter 2016
Report as at 30th June 2016
Having thought that the first quarter was eventful, nothing quite prepared us for what we saw in the second
The ensuing uncertainty has driven a sharp drop in the pound, and put commercial property and sectors exposed to the domestic economy under pressure. At the same time, the prospect of imported inflation has emerged. In the years to come, the UK will have to redefine its relationship with its European neighbours and the rest of the world.
However, this historic vote has reinforced our belief that trying to base investment decisions on the outcome of largely binary and opaque events (be they geopolitical or economic) is at best risky, and at worst reckless.
Instead, in times of political instability and economic unease, we firmly believe that it is vital to retain consistent investment principles and a robust process. Despite the events of the past few weeks, we at Adam & Company have not, and will not, change our approach towards managing your money – though, of course, we remain alert to any opportunities the turbulence brings.
While unprecedented, Brexit is unlikely to have much impact on the US economy – the engine of global growth. After a disappointing first quarter, more recent data suggests the US is on a sound footing, and we see little risk of a recession for the foreseeable future. The Federal Reserve appears to have parked the idea of raising interest rates for now, and other major central banks remain in easing mode as they work to support growth.
The global recovery continues to be hampered by the need to reduce large debt burdens, both in developed and emerging economies. In the UK, the need to cushion the blow on the economy from Britain’s departure from the EU suggests more moderate progress in reducing the fiscal deficit.
In the week following the referendum, Bank of England Governor Mark Carney implied that further monetary easing would be forthcoming to support economic growth, fuelling speculation of a quarter-point rate cut. While sterling’s precipitous fall may mean more expensive imports – and a consequent rise in inflation (with petrol and air fares already increasing) – we expect rates now to remain lower for longer than we had expected at the turn of the year.
While the US Fed is now in wait-and-see mode, we still expect the next move in US rates to be up. But we expect the central bank to continue to err on the side of caution, with any rises small and widely spaced.
Expectations for continued economic recovery underpin our continued positive view on equity markets over the longer term.
While gilts offer diversification benefits (they are not usually correlated to the performance of equity markets), the slump in yields to record lows mean they offer an increasingly meagre income. We prefer the higher yields/income offered by investment-grade (higher credit quality) corporate bonds.
In an increasingly uncertain environment, careful stock selection, with a focus on quality stocks over the long term remains key to investment returns.
Please remember that the value of investments and the income from them may go down as well as up and that you may not get back the amount originally invested. Past performance should not be seen as an indication of future performance. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down.