August Commentary

The latest reduction in interest rates in the UK, coupled with new credit facilities providing low cost funds to banks (subject to the proviso that they be lent on cheaply), together with the announcement of further quantitative easing, are all designed to support the UK economy at a time of materially enhanced risk. The stock market’s reaction to this has been to rally further. Financial markets have been propelled upwards by the virtual certainty that interest rates will remain even lower for even longer while the UK slowly works through a huge range of economic problems arising from Brexit. Clearly, “buying the market” is very different from “buying the economy”.

For investors, the attractions of good quality equities, paying often well-covered dividend yields of around 3% (in many cases based on appreciating foreign currency earnings) are not to be sneezed at. Holding excess cash at a time when the bank pays virtually no interest, when it is being reduced in real terms by inflation and in international value terms by depreciation of the pound, is not an attractive option.

We continue to believe that there is value to be found in a number of overseas equity markets and in areas of the UK market, particularly those focussing on companies with substantial earnings derived from overseas assets. Thus where an individual clients risk profile permits, we continue to overweight equity funds in portfolios while the emergence of a contrarian opportunity – UK smaller companies – may be emerging.

Fixed interest investment also becomes more attractive on yield grounds than are cash deposits while the reappearance of the Bank of England as a major buyer looks set to underpin prices for a while to come. In the meanwhile, index-linked investment, targeting inflation protection, also potentially gains as the depreciating currency looks set to add inflation to the economy.

Whether the present situation is working out quite as those who campaigned for Brexit had anticipated is unclear. What is however obvious is that the UK economy faces significant challenges for some years to come as the UK’s trading relationships with EU and elsewhere will take time to sort out. However, as suggested earlier, the outlook for the economy can be, and at this time is, very different to the investment outlook.