This is clearly going to dominate headlines for some time to come with the country seemingly in political chaos. Whether the exit eventually benefits the UK economy, we will not know for some time, but we do know that markets react badly to periods of uncertainty and that is what we now have.
Sterling has fallen to its lowest level for 30 years, but this does have advantages for exporting companies as their exports will now be cheaper abroad, making it easier for them to compete overseas. However we are a net importer of goods, so these goods will now be more expensive causing inflation. It will also mean that anything the UK borrows internationally will be more expensive. This will be exacerbated if, as seems likely, the UK economy is downgraded by the credit agencies.
So we will be left with volatile markets, which good managers can exploit to the benefit of the funds they manage. But it will not be easy and it seems that, as predicted, the EU will not make things easy for us.
With a new recession a real concern now, it seems that even if we have some inflation coming in from our imports, any rise in interest rates will probably be kicked down the road again. We could even see a reduction in rates again – negative interest rates anyone?
Of course when people talk of investment, most naturally assume that they are talking about stocks and shares (equities). That is an important part of any portfolio designed to beat inflation over the medium to long term although it is certainly not the only type of investment that forms part of our clients’ portfolios. Our portfolios will contain fixed interest investments, commercial property as well as some other investments usually designed to manage risk. These may react quite differently even if equities are performing poorly.
We still feel that equities offer the best opportunities for capital growth and income growth over the next few years. This is going to be extremely important when inflation does eventually move upwards, as it most surely will. We would expect the investments mentioned above to all form part of a fully diversified portfolio, and nothing will change my intrinsic belief that the best way of investing is to diversify a portfolio properly.