On 24 June, Britain voted to leave the European Union, an outcome that took many by surprise, including the financial markets. Three months on, are they on the mend, or is recovery slow in coming?
The first place to look is the currency markets. Sterling suffered a heavy blow in the aftermath of the referendum, and it has not improved since. The pound remains low against the Japanese Yen, US Dollar and Euro. In January, £1 would have bought you €1.36, whereas now it only buys €1.13, a whopping 116% decline. However, for Wealthify Plans, which hold lots of currencies outside of the UK, these movements have, in many cases, actually helped performance.
One of the effects of a weak pound is that it becomes more expensive to import goods into the UK. For example, buying a German car may have cost £20,000 at the start of the year, but today, with a weaker pound it costs £23,200. In time, the effect of this will trickle through the economy and should cause an increase in the price of goods overall, and therefore a rise in inflation. Wealthify Investment Plans are benefiting from this as they all contain inflation-linked bonds which, if inflation is set to rise, pre-empt the move and rise too. Our blog; 5 things you need to know about inflation will tell you a little bit more about how it works.
Despite the impact on Sterling, most stock and bond markets have improved since Brexit. In the UK, this can largely be put down to the Bank of England’s actions on 4 August. Firstly, they announced a cut in the base rate of interest, which at 0.25% is certainly not good news for savers. However, it is good news for investors as it has the overall effect of encouraging people to invest in financial markets, thereby increasing prices and performance. Secondly, the Bank also boosted its quantitative easing (QE) programme. In simple terms, QE means the Bank will buy more investments, creating more demand, which in turn boosts the prices of bonds and stocks.
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Elsewhere, the UK property market is recovering following the brief period of post-Brexit turmoil. Wealthify customers benefited from our investment strategy to sell down some property funds a couple of weeks before the vote, which protected Investment Plans from a potential hit. We were then able to purchase more at bargain prices in the weeks following the vote.
Overall, Wealthify customers will have seen strong performance since Brexit, with Plans up between 5.7% to 14.5%, depending on their investment style. But, whilst it has been good news for investors so far, we’re not out of the woods yet.
Prime Minister Theresa May is standing true to her word that ‘Brexit means Brexit’, stating that we will begin the process of leaving the EU before March 2017. Further afield, we expect more political instability from the forthcoming US, French and German elections.
Reassuringly, Wealthify’s technology and team of investment experts are monitoring all these events and the impact they are having on the markets and our customers’ Plans are well positioned, with enough in cash balances to enable us to take advantage of any dips in prices over the coming months.
1 Prices correct at 4th Jan 2016 (GBPEUR @ 1.3586) and 6th Oct 16 (GBPEUR @ 1.1306). All prices sourced from Bloomberg.
2 Prices taken from our model plans:
Adventurous Model with 0.7% AMC 07/04/2016-06/10/2016 +14.55% Total Return
Ambitious Model with 0.7% AMC 07/04/2016-06/10/2016 +12.29% Total Return
Confident Model with 0.7% AMC 07/04/2016-06/10/2016 +11.17% Total Return
Tentative Model with 0.7% AMC 07/04/2016-06/10/2016 +7.91% Total Return
Cautious Model with 0.7% AMC 07/04/2016-06/10/2016 +5.73% Total Return
Please remember that the value of your investments can go down as well as up and you can get back less than invested.
The comments and opinions expressed in this article are the author's own and should not be taken as financial advice from Wealthify.