Economic Commentary – June 2016

Economic Commentary

June 2016 has gone down in history as the month that the British people voted to leave the European Union, a truly momentous event that will permanently reshape Britain’s role in the global economy.

While opinion polls were tight leading up to the referendum, few believed that the “Leave” campaign would muster sufficient votes to win and bookmakers had the odds of a “Remain” victory at close to 80%.

The result sparked a wave of volatility in financial markets, with sterling being at the sharp end of the falls. As at the end of June, the pound had decreased close to 10% against the US dollar, trading at levels ($1.33) last reached in the previous two global crises – the 2001 dot.com crash and 2008 credit crunch. There were also sharp falls among banking stocks, both in the UK and Europe, and UK mid-caps, which are seen as sensitive to a potential drop-off in economic activity.

At the same time, safe-haven assets such as gold and government bonds outperformed, suggesting many investors are cautious on the immediate outlook.

What has surprised investors has been the overall strength of the equity markets. Apart from pockets of weakness, mentioned earlier, the wider markets have held up well since the Brexit vote.

The FTSE All-Share ended June higher than at any time in 2016, and the S&P 500 (the main index for US equities) is back close to its all-time highs.

Why this strength?

Well, one reason is that the biggest companies in the UK are international firms that derive the majority of their earnings from overseas.

In addition, investors are also weighing up the future actions of the big central banks – the Bank of England, the European Central Bank and the US Federal Reserve. A Brexit vote undoubtedly raises fears and uncertainties, which investors hate, but it also pushes expectations of interest rate rises further into the future, which is generally positive for markets.

Indeed, immediately after the vote Bank of England governor Mark Carney said the central bank would take “whatever action is needed to support growth”, including a rate cut and possible restart of the QE programme.

Against this uncertainty, at Flying Colours, we continue to build well diversified portfolios for clients. We have benefitted from our investments overseas, which have been helped by the weakness in sterling, and also exposure to government bonds. As a result, our models were all up comfortably up in June and we continue to look for opportunities to add value to our portfolios in the latest bout of market volatility.

 

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