Arguably, equity values are being restrained as a number of uncertainties remain in the forefront of market thinking. Further light will be shed on some of these this year (the UK will have voted in the EU referendum and, later on, the US election result will be known), while broad global supply and demand issues will take considerably longer to work out. All of this will in turn impact on company’s investment plans and profits but generally companies are relatively healthy and balance sheets strong.
Fixed interest markets are perhaps more uncertain. Ultra low interest rate policies (in place to stimulate demand) may yet endure for some while, but not indefinitely. In the interim, the fixed interest sector offers sound value for income focused clients but in years to come any sustained trend towards higher interest rates, triggered perhaps by an increase in inflationary pressures, will negatively impact on fixed interest investor’s total returns. These considerations therefore lead us to underweight fixed interest exposure within portfolios where this can be achieved in a manner compatible with individual investor requirements, and to an extent we favour greater use of Absolute Return funds for more risk adverse clients.
Finally, a word on the UK’s referendum debate from the point of view of our being observers of economic issues and of the potential impact that those issues may have on the investment outlook from the perspective of UK investors. If the UK elects to remain in the European Union then this country, as the second largest EU economy, will be in a strong position to lead debate and influence decisions as the EU moves forward. If the UK should vote to leave, then as we see it the only economic certainty is years of uncertainty, very likely stretching well into the next decade. The UK economy, in terms of scale and the range of activities, is not remotely similar to the parallels that have been drawn, for example, with Canada, Norway and Switzerland, whose trade deals are either restricted in scope or require acceptance of free movement of labour and of EU standards, without their having any influence on what those standards are. Given that the importance of the EU to the UK is much greater than the importance of the UK to the EU, it seems quite likely that any subsequent trade deal negotiation would have a one sided feel to it. A long period of economic uncertainty in respect of relationships with the EU and elsewhere will surely undermine the UK’s position as an inward investment destination of choice and as an exporter, an issue of material consequence for portfolio asset allocation unless perhaps Exchange Controls (eventually abolished in 1979) had to be re-introduced in order to restrict potentially damaging capital outflows.