A step into the unknown

Since the Lehman Crisis there have been 667 interest rate cuts by global banks!!!! (source BoAML August 2016)

The debate around whether the UK should remain or leave the EU was fascinating. On one side you had arguments around the economics, on the other you had a focus on things like immigration, bureaucracy and taking back control of our borders.

In a sound logical world, you would argue that economics would win the day; why would anyone vote for something to happen which had the potential to derail the UK economy, and personally make us worse off? However, the arguments to stay or go where extremely complex and the reality was that no one knew (or knows) what the final outcome will be.

For this reason, it actually seems more logical that individuals vote for what they understand. If we fear that employment is under threat by people coming from Europe we will want to do something to protect that; if we feel our business is struggling under the weight of EU bureaucracy, we will want to do something to change that and so on. The point being that if we took a step back from the whole process and avoided noise and opinion polls, it actually seemed obvious that ‘vote leave’ would be the victor.

You could argue that hindsight is a wonderful thing, but often we get so entrenched in something that we can’t see what is in front of us.

In this blog I want to explore how our opinions and beliefs should always be challenged by events, and in particular I want to focus on “BREXIT”. It is worth adding that BREXIT has not happened yet and whatever the papers print no-one actually knows what the future holds.

Interest Rates

Since the Lehman Crisis there have been 667 interest rate cuts by global banks!!!! (source BoAML August 2016). In the UK, interest rates have been at historic lows since 2009 and have in reality been falling since July 2007.

Prior to BREXIT there would have been sound arguments to say that interest rates would rise either in 2016 or 2017. For those worried about this happening it made sense to fix mortgage rates at the lowest level for as long as possible. If we look at mortgage data, there was a spike in applications during 2015 (source trading economics) which supports these thoughts.

June 23 2016 changed everything; and at that point instead of rates going up, it appeared that they would be reduced and in August they dropped to 0.25%. There is the potential for rates to fall further, and there are strong opinions that they might not go up again until 2020 at the earliest. Unsurprisingly with this in mind, mortgage applications significantly dropped in July.

For those locked into fixed rate mortgages, there is very little that can be done at the current time. For others, the landscape has changed and this needs to be revisited and new plans drawn up.

Savings rates

We have written a separate blog on this but it is worth re-emphasising the correlation between interest rates and saving rates, and the use of cash.

In the past high interest rates and hence high savings rates meant that the interest paid could be used to effectively provide an income. But the point is that this has not been possible since 2009. Even if the vote had been to remain and interest rates went up, it would have been slow and never to the levels it had been in the past.

The reality is that for the last 30 years those looking for income from assets have had to adapt to a changing climate and that means moving away from cash to “riskier” assets to achieve the outcome they want. This is not new.

It is worth adding at this point that one area that investors have favoured is fixed interest (debt). Data from the Bank of America in August 2016 showed that 54% of Sovereign (Country) Debt and 28% of Corporate Debt is negatively yielding!! I.e. these are producing no returns and yet money continues to pour into this sector.

The BREXIT vote hasn’t changed how we see cash but it should be the final nail in the coffin for those who are stuck in the past, thinking that it will one day become an income producing investment. Those days are well and truly gone!

Investment strategy

Market shocks are all part of investing. In August and September 2015 and then in January through to Mid-February 2016 the stock market faced extreme challenges. The UK is part of a global economy and there is a lot happening.

Data from Citi in June 2016 showed that there are 40 armed conflicts in 27 locations, the highest in a decade, and that more elections and governments have collapsed in the last 3 years in major economies than in the previous decade. We live in very uncertain times.

On 24 June 2016 the UK stock market reacted negatively as we would expect but since then has rebounded very strongly. Investors often assume that the FTSE 100 is a barometer for the economy and therefore could be mistaken for thinking that everything is fine! The reality is that 45% of the FTSE 100 have overseas earnings which has meant with the fall in sterling their profits have gone up, driving share prices up. Of course there are other factors but clearly investors need to dig a little deeper.

Those companies that were hit initially were domestic focused and in particular those sectors where the market saw the greatest danger. There was no discrimination in the companies so financials were all lumped together irrespective of whether one was in a better position than the other. And it wasn’t just financials; housebuilders and really anything to do with the property market dropped, and of course there are more examples we could turn to.

When everything seems to be crashing in around us it is sometimes very difficult to know what is the right thing to do. Fundamentally investing is about long term views and diversification. At times like this it is worth looking at the investments we have and considering whether anything has changed in terms of the original thesis that drove us to invest in that stock or fund in the first place.

It’s interesting to see during these times, that funds that track the index have in many cases significantly outperformed managers who look to actively outperform the index. This reflects that often those opportunities where managers look to make money are hardest hit when markets go down. Data from Hargreaves Lansdown shows a growing popularity in passive funds, and this will no doubt grow as the performance seems impressive this year. But interestingly we are starting to see the performance differentiation shift.

To conclude a market event shouldn’t be the only time that we challenge our investment strategy, we should do this consistently. Yes, 23 June changed things but there will always be such events, there are conflicts, there are elections, there are collapsing governments etc. The key question to ask is whether we have produced an investment strategy for the long term or to try and capture short term fluctuations (which is often doomed to failure!)


Going back through our blogs we argued that there was likely to be a property correction as all the signs pointed to this. There was a mini bubble at the start of the year as investors sought to purchase “buy to let” properties before the tax changes but then the property market seemed to slow. There were some signs on the ground that it was not as “hot” as it had been.

Assuming there was a vote to remain and interest rates started to go up, then we would continue with our view that prices would start to correct. But things have changed, there are two factors one more localised and one more country wide.

Firstly, interest rates play a part in the property market; if they are rising then people have less money and it costs more to pay a mortgage which acts as a natural brake to cool the market. But interest rates have halved and are unlikely to be rising anytime soon. This means that repayments become more affordable, and people naturally feel better off.

Secondly, and this is more regional with a fall in sterling UK property becomes more attractive to overseas buyers because effectively they are buying at a discount.

We have seen in the aftermath of the vote that deals fail, or reductions are applied but there is the potential now for the property market to stabilise and avoid a 1988/89 type market crash for now.

So what does BREXIT tell us

At the moment we don’t know what BREXIT means and what will happen, but there are some things we are more certain of:

  1. Interest rates have fallen, and have the potential to fall further
  2. Interest rates are unlikely to rise any time soon and could remain at this level for potentially five years
  3. Saving rates have been declining decade on decade and nothing is really going to change in the foreseeable future
  4. Investment strategies need reviewing but it is likely in many cases if it was right before it is still right now
  5. House prices in the short term are unlikely to experience a 1988/89 correction

All of this means we need to go back to our financial plan, and see how all of this has changed what we want to do in the medium to long term.

Note: This is written in a personal capacity and reflects the view of the author. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

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