Quarterly Investment 


Third Quarter 2016

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.

Data shows that in the short term, the UK economy has been resilient. Unemployment continues to fall, consumer spending is buoyant, and business activity has been strong, particularly in the services sector.

It is too early to determine the effects of Britain’s vote to leave the EU. PM Theresa May announced at the Conservative Party conference in October that Article 50 of the EU treaty, which will officially kick-off Brexit negotiations, will be invoked before the end of first quarter of 2017.

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.

Over the quarter, we have tried to take advantage of sell-offs in some domestically exposed stocks where we thought that the underlying business would remain robust, despite uncertainties following the vote, as valuations have fallen and they look good value.


The Yield Squeeze

Bond yields fell to new record lows (prices rose) early in the quarter as major central banks ramped up their monetary easing measures. The Bank of England (BoE) cut the base lending rate to a record low of 0.25% in August and resumed its bond-buying programme, while the Bank of Japan announced yield caps at its latest meeting and committed to buying assets until inflation exceeds its target of 2%.

Ten-year gilt yields tentatively reached a low near 0.5% soon after the BoE rate cut and have been inching up since. Ten-year US Treasury yields reached lows in early July and the German 10-year yield, which dropped into negative territory in late June, was marginally positive by the time of writing. Our portfolios remain underweight in government bonds, which we view as expensive.


Staying Positive Amid Geopolitical Uncertainty

Our analysis suggests the outlook for world equities remains positive, with healthy US consumer demand, and a steadying China providing support to global growth and earnings. While interest rates remain low, investors will continue to search for reliable income and buy equities that deliver robust, diversified profits and pay cash-backed dividends.

Political uncertainty continues past the US vote, well into 2017, as French and German elections loom large in the minds of Merkel and Hollande (and the Brexit negotiators on both sides).

Investment grade (higher credit quality) corporate bonds have performed well this year, and we believe they still offer attractive risk-adjusted yields over government bonds. While the UK commercial property sector still faces some headwinds, evidence shows that concerns over a post-Brexit exodus are exaggerated and UK commercial property in general is reasonably valued, particularly for overseas investors attracted by the fall in sterling.

We continue to invest for the long term and select assets that we believe offer good value and remain diversified in order to reduce risk.

As ever, speak to your Portfolio Manager with any questions about your investments, and do refer to for more insight.

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.

Important information

Issued by Adam & Company Investment Management Limited, which is authorised and regulated by the Financial Services Authority. Adam & Company Investment Management Limited is registered in Scotland Number 102144. Registered Office: 25 St Andrew Square, Edinburgh EH2 1AF.

The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Past performance should not be taken as a guide to 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.

The information in this webpage is not intended as an offer or solicitation to buy or sell securities or any other investment or banking product, nor does it constitute a personal recommendation. The information is believed to be correct but cannot be guaranteed. Any opinion or forecast constitutes our judgement as at the date of issue and is subject to change without notice. Any Adam company, or a connected company, its clients and officers may have a position or engage in transactions in any of the securities mentioned.

The analysis contained in this webpage has been procured, and may have been acted upon, by Adam & Company Investment Management Limited and connected companies for their own purposes, and the results are being made available to you on this understanding. To the extent permitted by law and without being inconsistent with any applicable regulation, neither Adam & Company Investment Management Limited nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon such analysis.

Not all products and services offered by the individual Adam companies are available in all jurisdictions, and some products and services may be available only through particular Adam companies.

None of the overseas Adam companies or offices is an Authorised Person subject to the rules and regulations made under the Financial Services and Markets Act 2000 for the protection of investors and depositors, and compensation under the Financial Services Compensation Scheme will not be available in respect of business transacted with them.

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