We had a fantastic turnout at our recent client briefing.
These are events we run each quarter to give our clients a detailed overview about what is happening in markets and our thoughts as to what could happen in the future. They are normally well attended with an average of around 80 clients coming along to hear what we have to say.
However, it’s fair to say the recent EU referendum result and subsequent market reaction has increased interest in what is happening in portfolios, and in the economy in general. As a result, for our recent briefing which focused on Brexit we had an unprecedented 250 attendees!
In general, the message we gave at the briefing is that we are somewhat cautious about the outlook for the UK economy. We are also managing portfolios quite conservatively right now. That said, the result has actually had a very positive effect on portfolios.
In particular, the fall in the pound has helped the performance of our overseas funds. Even many UK listed stocks have done well, especially where the firms make much of their money overseas.
The recent rate cut and quantitative easing from the Bank of England (expected at the time of the briefing, but confirmed since) have also helped both equity markets and especially bond markets, with fixed interest doing very well.
Much of our latest thinking is covered in our recent investment newsletter, which can be found here.
As well as presenting our thoughts, we always allow plenty of time at the end of presentations for clients to ask their questions. Below are some of those we were asked at the briefing and our responses.
Q) There is a clear indication that inflation is likely to rise, is this a good thing or bad thing for the economy?
A) Inflation can sometimes be a good thing if it is caused by rising wage inflation, which then tends to see our house prices go up for example. However, if we see some inflation in the next year or so it is likely to be caused by the drop in the pound. This means that goods from overseas will be more expensive, and so means people might have less in their pockets at the end of each month.
Q) Balanced and adventurous model performance is normally quite close but recent figures show they’re separated, why is this?
A) We recently made the adventurous portfolio more adventurous precisely for that reason – to differentiate it more from balanced. We wrote to all clients to explain this change and if they were uncomfortable with the extra risk we moved them to balanced.
Those that stayed on the new adventurous model have benefited in the short term as they have more in equity, and stockmarkets have risen.
Q) On balance is it a good time to dip your toe into the buy to let sector?
A) Given the weaker economy it is possible you might get a better entry point by waiting – if house prices go down!
That said, if you can achieve a decent rental yield of 5% or 6% then with borrowing costs so low it can be possible to make some reasonable returns. Buy to let can be quite labour intensive and can also be risky, so it is not for everyone.
Q) Given the prospects for interest rates and Inflation, what advice would you give to a younger clients about mortgages?
A) Of course, everyone has different circumstances but right now seems to not be a bad time to take out a mortgage given record low interest rates. If someone is considering buying a house then I would not let the current situation stop them, even if prices could weaken in the short term. As we always say, you are buying a home rather than an investment so you shouldn’t worry too much about short term capital movements.
Q) Given that some economists are suggesting that we may have a longer period of stagflation are we considering having a broader investment remit at Equilibrium?
A) We already have a broad investment remit and as the environment changes we adapt. Right now we have a lot more in alternative equity and defined returns which are our response to lower potential returns from traditional assets such as equity, fixed interest and property. We are also actively looking at other options all the time.
Q) What will be the catalyst for when you re-invest the cash from coming out of property, or is it an unknown?
A) There are several possible catalysts. For example, a drop in markets might lead us to top up equities. An increase in market volatility might lead to very attractive potential rates on defined returns, or signs of stability in the property market might lead us to put more money back in there.
We don’t anticipate holding so much cash for very long as we expect there will be opportunities around the corner.
Q) Given the drop in the pound would you consider holding that cash in other currencies, or is it all in sterling?
A) The cash is currently all in sterling and this does not affect our ability to invest abroad as we can invest very quickly. The risk with holding other currencies is that it becomes a currency bet, rather than a cash position. The cash is there to remain liquid and stable in an unstable environment, so needs to remain in sterling.
Q) Would you consider investing in gold?
A) We don’t invest in gold directly but some of our funds have some exposure. The problem with gold is it is not a true investment. It produces no income or dividend and has no real usage, so it is impossible to say whether it is good value or bad.
Gold is simply a “fear” trade – it does well when investors are scared. However it is very volatile and when investors become more comfortable it can drop very quickly.
Q) If we go to negative interest rates, what would happen to tactical cash?
Firstly, we think it unlikely we will go to negative rates and if we do it is a long time away. We think the Bank of England will try huge amounts of quantitative easing before they try negative rates.
However, if we can do volatility trades on this cash making 5% return each time (as we have done in the past), this would offset any loss from negative rates. We would therefore still be likely to keep cash if we felt we could profit from market volatility.
Q) How will leaving the EU affect the City of London in particular with the loss of “passporting”?
A) At present, if a firm has an operation in one EU country then they can operate in all EU countries. For example, a big American investment bank who has a London operation can then sell their services all over Europe.
If we leave the EU then this “passporting” arrangement ceases. That will need to be a key part of any new trade deal.
If there is a loss of passporting then some firms will need to set up new operations. We are already seeing more staff of some firms being based in Dublin or Frankfurt rather than London and this could become a trend if not handled correctly.
Q) Do you have a view of when you will invest back in property?
A) At present it is difficult to say. It might not be that long depending on how the market behaves, how much capital values fall and generally how things pan out.
Anecdotally we are hearing that many property deals have proceeded on the same terms as before the referendum. Where there has been a big hit is in London, particularly the City. The consensus is that City offices will be hardest hit because of some of the issues outlined above.
It could be perhaps 6 months or a year, but maybe sooner if the right opportunity arises. We also need to watch the flows and be careful about liquidity.