Third Quarter 2016
Report as at 30th September 2016
Most financial markets have recovered following the UK’s vote to leave the European Union (EU) in June, although political uncertainty remains a risk.
UK equities and commercial property recovered strongly from their post-Referendum sell-off during the quarter, but the pound has continued to fall sharply.
While the FTSE 100 reached new highs for the year and the S&P 500 set a new record over the review period, the performance of different sectors has diverged sharply. Exporters have done well as they sell cheaper goods abroad, and as earnings are translated into more pennies and pounds in the UK. However, UK and European banks continue to hit new lows, as they struggle with regulatory fines, reputational fall-out and low margins in this ultra-low interest rate environment.
UK equities and commercial property recovered strongly from their post-Referendum sell-off during the quarter, but the pound has continued to fall sharply
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.
The global economy continues to deliver muted overall growth. Europe is recovering, slowly, and fears of a hard landing in China appear to have been allayed.
The data from the US, still the engine of the world economy, shows that unemployment is still falling and the outlook is positive. The IMF forecasts continued trend growth of 2.5%.
The IMF forecasts that the UK will have a strong 2016, but has downgraded growth expectations for 2017. Advanced economies are forecast to continue at low trend growth, of around 1.6%, as debt burdens continue to cast their shadow.
As Brazil and Russia’s economies recover from the falls in oil prices over 2014-15, emerging markets will continue to deliver growth of near 6%.
Given the precipitous fall in sterling, imports will become more expensive, and consumers will see this soon in rising prices of everyday items such as petrol, food and clothing.
The Bank of England cut the base lending rate to 0.25% in the summer, to mitigate the effects of Brexit, and has signalled that it will be tolerant of some inflation rather than dampen economic growth with rate rises, indeed potentially cutting rates to 0.1%.
Both the European Central Bank and the Bank of Japan have reiterated their intention to continue and increase their substantial liquidity easing programmes in order to stave off deflation.
As investors seek higher-income assets while bond yields remain very low, we expect continued demand for equities and property assets that pay a higher income.
Infrastructure stocks will continue to be well supported, as governments are expected to announce extensive programmes as they take advantage of ultra-low borrowing costs.
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 and in some cases a negative income or capital loss.
We look to bond funds that can diversify globally to deliver returns, and also prefer the higher yields/income offered by investment-grade (higher credit quality) corporate bonds, although we of course remain aware that careful selection is key.
In an ever-uncertain environment, stock selection, with a focus on holding decently valued, diversified, good quality assets over the long term, remains a key factor in 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.