Market Analysis

When making investment decisions, there are a lot of things to consider and just as important as the initial decision of where to invest, is to keep an eye on how investments and markets are performing.

Working with a number of leading investment specialists, expert analysis will be provided, looking at key drivers and markets - home and abroad.

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Market update - Brexit Special

John Husselbee, Liontrust

September 2016

June’s unexpected Brexit vote has dominated the landscape in the subsequent weeks although as yet, the worst predictions of economic collapse are yet to materialise.

In fact, after a short blip in the stock market immediately after the vote, the FTSE 100 index – which includes the 100 largest companies in the UK – has been on a rising trend and is currently just below the highest point seen in the last five years.

As the smoke from Brexit cleared, it quickly become clear that the initial fallout would be largely political rather than financial. Longer-term of course, debate continues on what the financial implications of Brexit might be and the simple answer for now is that no one actually knows.
The vote revealed many faultlines in the UK – between generations as much as political parties – and there is still little clarity on how exit from the EU might look in practice. Brexit also caused the downfall of David Cameron and George Osborne, leaving new Prime Minister Theresa May to deal with the practicalities of untying a 40-year marriage, while the Labour party remains in a fractured state.

We continue to reiterate the message we stuck to throughout the long weeks of Brexit argument – investors should focus on the long term and the biggest risk is giving way to panic and abandoning a long-term strategy based on short-term anxiety.

We always felt a leave vote could cause short-term panic and reduced our equity exposure in May to protect against this. But our approach is to focus on attractively priced assets and we always want to own things for the long term rather than trying to buy and sell at exactly the right time to make maximum profit – which is all but impossible to do on a consistent basis.
There is an expression in financial markets that investors should never ‘fight the Fed’, meaning that, for the most part, it has been sensible to invest in line with the monetary policy of the US central bank, the Federal Reserve, rather than against it.

Central banks around the world have been hugely influential in recent years – printing massive amounts of money to prevent economies falling into recession – and stand ready to take further action if we see a fresh outburst of panic. This was clear from the Bank of England cutting interest rates in August to a record low of 0.25%.

Interest rates were expected to start rising this year in the UK and US as economic growth continues to improve – but Brexit looks to have put the brakes on that for now and the UK’s central bank could cut again this year if more help for the economy is deemed to be necessary.

In our portfolios, we remain broadly positive on equities and more cautious on bonds, seeing the latter as more expensive. Looking forward, we believe some of the post-Brexit panic is overdone and would stress that such events always throw up opportunities for careful investors.

Stephanie Flanders, current chief strategist at JP Morgan and former economics editor at the BBC, has compared Brexit to an earthquake, in that it was sudden and unexpected and the effects are largely felt closest to the epicentre. Fear is continuing to cloud our judgement in the UK whereas the global economy has already moved on. The rest of the year has plenty to offer in terms of significant events, with the most divisive US election for decades as well as a potential flashpoint in the European Union as Italy holds its own referendum on political reform.

In the meantime, we continue to stick to our long-term process of owning assets when they are cheap and, where possible, avoiding them when they are expensive.

The value of investments and any income may go down as well as up and will depend on the fluctuations of investments and financial markets outside of the control of Liontrust Investment Solutions Limited. As a result a client may not get back the amount originally invested. Past performance is not indicative of future performance and any reference to a security or fund is not a recommendation to buy or sell.

Market Update - Quarter 1 - 2016

As we enter 2016, Western economies are set to continue their gradual but distinctly sub-par recovery, against a backdrop of worryingly low inflation rates and slowing global trade volumes. For the first time since the credit crisis, investors will also be facing genuinely divergent money policies among the major central banks in 2016 – with active quantitative easing programmes underway in Europe and Japan, but a rate tightening cycle beginning in the US.

Even this relatively modest global recovery has come at a price: namely, the need for near zero interest (and in Europe’s case negative) rates across most of the developed economies. Remarkably, it is now almost a decade since the last US rate rise, and still headline inflation rates are only marginally positive and remain well below central bank targets. In short, policymakers continue to scratch their heads, so expect more monetary policy ‘innovations’ as the year progresses.

In the midst of such a conundrum, 2015 has seen deflationary forces worsened by ongoing commodity price falls, with metals, foods, gold and crude oil lower by between 12% (gold) and 40% (West Texas crude) over the last 12 months. The drastic falls in emerging market currencies which have come along with this highlight the accompanying scale of the trauma which has engulfed developing nations, and in particular commodity producers.

However, there are reasons to be more positive for 2016. OPEC’s (Organization of the Petroleum Exporting Countries) sizeable current account surplus has largely been whittled away, with the result a potential for roughly $650bn transferred from the oil producers to consumer economies (Asia being the net winner). Together with cheap currencies (particularly in Brazil and Russia), we expect to see export markets rebound, trade accounts improve and (in time) rising disposable incomes. In effect, then, today’s emerging world curse could become tomorrow’s opportunity. Emerging world consumers and small businesses are the likely winners.

Meanwhile, the Chinese economy will continue to form a key part of the global trajectory ahead. As China develops its economy away from the world’s factory, the nation is broadly experiencing a pivot from an industrial to a consumer led economy. The direction of travel is the right one, but suggests more short-term pain for Chinese (and global) manufacturers. 2016 should also see value appearing in the less leveraged State Owned Enterprises, and China-related Hong Kong blue chips as corporate restructuring progresses.

Finally, global banks, led by the US, will continue to strengthen balance sheets, simplify their business models and potentially finally start to see an end to penalties and fines. This offers considerable dividend growth opportunities and the chance to add to the ‘value’ content of portfolios.

All of this is occurring in a world where, despite a rather languid recovery and stubbornly low productivity, employment figures across developing economies look relatively robust. In the US, inflation is set to bounce back sharply into 2016 as base effects fall away, while the labour market prepares to tighten even further as wages begin to climb. Naturally the US Federal Reserve will be watching this picture closely as they make their ultimate return to rate rise territory.

Yes, we do see risks to the investment landscape. A strong dollar, slowing Chinese growth and falling commodity prices have heightened world deflationary risks (though they have also kept interest rates at or close to zero). Crucially, though, the traumatic commodity and energy price collapse appears largely complete, and while low food, oil and metal prices, coupled with near zero developed world interest rates certainly suggest deflationary risks, they also offer the potential foundation for recovery in Europe and energy-consuming Asia.

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This document has been issued by Sarasin & Partners LLP which is a limited liability partnership registered in England and Wales with registered number OC329859 and is authorised and regulated by the UK Financial Conduct Authority and passported under MiFID to provide investment services in the Republic of Ireland. The information on which the document is based has been obtained from sources that we believe to be reliable, and in good faith, but we have not independently verified such information and we make no representation or warranty, express or implied, as to their accuracy. All expressions of opinion are subject to change without notice.

Please note that the prices of shares and the income from them can fall as well as rise and you may not get back the amount originally invested. This can be as a result of market movements and also of variations in the exchange rates between currencies. Past performance is not a guide to future returns and may not be repeated.

Neither Sarasin & Partners LLP nor any other member of Bank J. Safra Sarasin Ltd. accepts any liability or responsibility whatsoever for any consequential loss of any kind arising out of the use of this information or any part of its contents.

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