Politics and economics shape market outlooks


Andrew Milligan

2nd September 2016 at 11:00am

We ask Andrew Milligan, Head of Global Strategy at Standard Life Investments, to take a closer look at the impact of the EU Referendum on markets following the ‘Leave’ vote. He also considers some of the other issues which may affect markets and what they could mean for investors.

Finally, Andrew reiterates why it’s so important to remain diversified by spreading your money across different types of investments, geographical locations and industries.

Q: Will the impact of the UK’s referendum be good or bad for the economy or markets?

Good or bad? No, it’ll be different.

After the initial shock following the result, UK stock markets have recovered and are showing remarkable resilience as they near all-time highs. However, the speculation of “when and how will it happen” around Brexit makes this a more challenging environment to invest in.

There are many uncertainties surrounding the UK’s vote on EU membership:

  • When will Article 50 be triggered?

  • What does the vote mean for politics in other parts of Europe?

  • How quickly can new trade agreements be reached with other countries?

One of the few certainties is that the value of the pound will need to be lower to help the UK economy adjust to a new situation. For that reason, Standard Life Investments prefers other currencies to the pound.

Q: You mention the low pound: are you worried about the value of sterling?

If you look at the fall in sterling over the short term, it looks dramatic. But, when you look at it over a longer period, it’s small. In fact, the recent fall has been useful in helping the UK adjust following the Brexit result.

Looking ahead, a risk for the UK is that overseas investors decide that they don’t want to invest here because of the increased uncertainty. If this happens, we could see a much larger decline in the value of the pound.

Another big issue for investors is the growing effects of weaker business and commercial investment on the economy. It’ll mean careful analysis about which companies to invest in: larger companies are generally driven more by global growth and the level of the pound, whereas medium to smaller companies will be driven more by what’s happening in the UK economy and domestic cost considerations.

Q: The Bundesbank has suggested raising the retirement age in Germany to 69 by 2060: do you think other central banks will follow suit?

Yes. Demographic trends are pretty clear in most countries: people are living longer. Pension schemes, whether public or private, can cope better if the retirement age is raised.

The UK has already moved ahead on this. Germany is following and other European countries will need to make some politically difficult decisions.

The News and MoneyPlus Blog article, Busting those pension myths and misconceptions tackles some of the issues over saving for retirement in the UK.

Q: Where should investors be looking if they want income?

This is an environment of low growth, so bonds, most equities and property are all expensive. However, they’re all being driven by the same factors – a ‘world of low numbers’ reflecting weak inflation, zero or negative interest rates, and central banks buying not just government bonds but other assets such as corporate bonds, even equities in some countries.

Negative interest rates across Europe and Japan are driving investors to look for income in a range of other assets – high yield and emerging market bonds, commercial property and infrastructure, or private markets to name a few.

Q: What do you think the outlook is for commercial property, particularly within the UK?

In the UK, the referendum fallout continues to affect trading liquidity – how many properties can be bought and sold without their market price being materially affected – and cause many property assets to fall in value. However, property remains attractive in terms of the income it provides investors with compared to other asset classes, although there are still risks if political uncertainty persists or if there’s a recession.

Although confidence in commercial property funds is clearly low at the moment, due to some fund managers suspending trading or lowering the values of their funds’ property assets, the fundamental reasons for investing in them remain the same as they’ve always been.

Find out more about what’s happening with the property markets since Brexit in Jenny Holt’s (Head of Investment Solutions at Standard Life) article.

Q: Could the stability in commodities, such as oil, be helping wider markets?

Oil prices do look to be stabilising in the $40-55 dollar per barrel range. Supply and demand drivers are beginning to work – if prices are too low then the pressures on suppliers who aren’t members of the Organization of the Petroleum Exporting Companies (OPEC) become too great; if prices rise towards $60 then shale oil suppliers in North America become profitable again and can switch on new supplies.

Stable commodity prices can increase the attractiveness of large oil companies and the energy supply industry. They can also improve the outlook for many emerging markets, which are often both exporters and importers of commodities.

In summary, there is moderate growth

The global economy continues to show moderate growth into the second half of 2016. As we’ve highlighted, the unexpected result of the UK’s EU referendum will dampen economic activity in the UK and parts of Europe. But it’s worth noting that economic outlook in China is stabilising and it’s improving in the US.

Overall, we think it’s important that central banks and governments keep monetary and fiscal policy at steady levels to offset another shock (such as Brexit) to households and businesses, as well as try to revive inflation, which generally remains below official targets.

Diversification is crucial

We can’t predict all the factors affecting the performance of different investments (or asset classes) and in most years the difference between the best and worst performing asset classes is really big.

To get the real benefit of diversification, it’s important to hold investments that don’t move in the same way as each other. This could help you achieve a much better balance between risk and return.

The views expressed by Andrew in this blog should not be regarded as financial advice. You should speak to a financial adviser if you’re in any doubt about your investment options. There may be a charge for this.

The value of any investment can go up or down and may be worth less than was paid in.

The information in this blog or any response to comments should not be regarded as financial advice and is based on our understanding in August 2016.

Andrew is a regular contributor to the Standard Life Savings News and MoneyPlus Blog. If you’d like to hear more from him, take a look at his portfolio of articles here.

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