Quite remarkably, the FTSE 100 Index closed higher than its pre-Brexit level yesterday. But is this the start of a new period of stock market growth or are we merely witnessing a dead cat bounce? Of course, only time will tell but we are starting to form some opinions about what is actually happening.
The good news is that the lower exchange rate is providing an immediate and significant boost to those UK companies with overseas earnings. Also, the prospect of rising US interest rates is diminishing. Indications are that there is currently only a 20% chance that the Federal Reserve will raise rates before the end of the year.
The bad news is that a subsequent widening in the UK’s current account deficit will almost certainly damage Britain’s economic output. The net result is highly likely to be a recession, although we are hopeful that this will be shallow and short-lived.
Of course, there are a great many questions without answers at this stage. But the key question is whether or not we are likely to see problems further afield. Will the referendum outcome be the catalyst for a much broader, global slowdown? We suspect not but over the next few weeks, things should become clearer.
As I noted in last week’s initial referendum response, we must take solace from the desire of the world’s central banks to take whatever action necessary to support the financial markets. Shortly after I wrote that, Mark Carney delivered a calm and impressive statement;
‘I am satisfied that the Bank of England has undertaken extensive contingency planning… is working closely with… overseas central banks… and will …take all necessary steps to meet its responsibilities for monetary and financial stability’.
As I write this, Governor Carney has announced that interest rates could now be cut as soon as next month. This is a clear and decisive illustration of the Bank of England’s resolve to support the economy.
Despite these challenging conditions, we are pleased to report that in general, our investment portfolios are demonstrating great resilience to the market volatility. This is due to the wide diversification of assets that we have always been so keen to maintain for our clients’ funds. In particular, we are pleased to note that our fixed interest holdings have been serving their purpose by performing well during times when share prices have fallen.
As the chart shows, throughout the last 6 months, our fixed interest exposure (illustrated by the red line) has served a valuable purpose, counterbalancing the volatility of shares (the blue line).
We maintain our stance that well diversified portfolios should be maintained during periods such as this. Such an approach should enable investors to protect capital and drive long-term returns in the future. We shall of course continue to watch the situation closely and will endeavour to keep you updated as and when necessary.
In the meantime if you wish to contact us to discuss the situation, please give the team a call on 01462 687337 or email email@example.com.
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