INVESTMENTS SINCE BREXIT

It is nearly 3 months since the EU referendum result. We have seen some unusual circumstances and results for investments since Brexit. This article examines some of the key changes and implications for your investments since Brexit. We also share the results of our investment approach since the Brexit vote.

This article contains information, which was correct at the date of publishing, but may no longer be the whole picture.

 

Key points:

  • What has happened to investments since Brexit
  • UK stock market rally
  • Problems particularly with UK commercial property since the Brexit vote
  • UK gilt values boom due to quantative easing
  • Our investment approach since Brexit

What has happened to investments since Brexit?

UK stock market investments since Brexit

Initially, there was a shocked and panicked response to the Brexit EU referendum result. In the few days after the result, the UK stock market declined rapidly. The average UK shares investment fund saw a drop of 8.33% in the 2 days following the Brexit result. However, UK stock markets quickly saw a recovery, as investors realised that the vote result did not mean immediate change. In fact the UK Government and the Bank of England has moved to reassure markets that change is not imminent. Ultimately, this has led to a short-term boost to UK shares, although whether this continues depends on the results of forthcoming negotiations.

This data shows the average UK shares unit trust and the average UK smaller companies unit trust between 23rd June and 13th September.

investments-since-brexit-uk-shares

This chart shows how the average investment in UK shares dropped initially after the Brexit result, but soon recovered. Many investors who panicked initially may have sold at a loss of 8-10% on just a few days previously. They may have also failed to see the positive recovery in UK shares since the EU referendum result.

Source: Financial Express Analytics

UK property investments since Brexit

UK property prices have seen some mixed results since the EU referendum result.

Residential property prices are reported as increasing, although there is some time lag in these results, and may be partly down to fewer homes being available for sale since the Brexit result as homeowners wait to see the outcome of negotiations. Having fewer houses available for sale can mean a boost in prices for those that are left on the market. This is backed up by data from the UK Office for National Statistics which shows that there were 8.3% fewer houses sold in July 2016, compared with July 2015.

Commercial property prices appear to have suffered since the Brexit EU referendum result. This is because of a general expectation that the economy could hit a negative period when negotiations start.

This data shows the Halifax residential property index and the IPD commercial property index between 23rd June and 13th September.

investments-since-brexit-uk-property

Source: Financial Express Analytics

As you can see, the average prices for residential properties appear to have continued to rise since the Brexit result, but average commercial property prices appear to have dropped.

Property fund liquidity

Immediately after the EU referendum result UK property investment funds saw a large increase in requests for cash withdrawals as investors sought to protect themselves from a perceived slump in commercial property values. This caused difficulties for some UK commercial investment funds. These funds primarily invest in large retail or industrial buildings. If investors seek a return of their cash then the property funds must sell some buildings. Clearly, if you want to achieve a fair return, this is not possible to do quickly with property sales. The temporary solution was to either impose a large exit charge, or to halt fund redemptions. While this did not affect all UK property funds, it has dampened expectations for this investment class.

Our investment portfolios hold a relatively small percentage of UK property – between 0% to 5%. This is partly due to diversification reasons, and partly because funds like these occasionally see short-term liquidity problems like this, which prevents access to the funds. Most of our portfolios remain unaffected, and those clients who are affected are in no difficulties since their remaining funds continue to be accessible.

UK gilts investments since Brexit

Following the Brexit EU referendum result, the Bank of England quickly moved to provide liquidity in the financial system by launching another round of Quantative Easing. This process released an additional £70 billion into the UK economy as the central bank created money to buy back privately held assets like UK Government gilts and corporate bonds. Interestingly, the total allocated to this quantative easing is now £435 billion (around a quarter of 2015 GDP).

In theory, this policy boosts the free flow of money in the economy, and also boosts share prices. At the same time, the Bank of England lowered the base rate to a historically low 0.25%, and made the terms for lending to banks more attractive in an attempt to get them to lend more into the economy. Read more about the Bank of England’s actions since the Brexit vote.

The initial effect has been to push down gilt income yields (which were already very low), which is a problem for final salary pensions and annuity purchasers. The flip side of the policy is to boost gilt capital values.

This data shows the average UK investment fund for UK gilts, index-linked gilts (inflation linked) and corporate bonds between 23rd June and 13th September.

investments-since-brexit-uk-gilts

Source: Financial Express Analytics

As you can see, the capital returns on gilts in particular have been amazing in such as short period, which would be highly unusual under normal investment conditions.

Other financial indicators since Brexit

Currency exchange rate since Brexit

Here you can see data showing the relative performance of the UK Sterling currency versus the Euro and the US Dollar. Clearly, the Pound has weakened by 12.31% versus the US Dollar, and 11.14% versus the Euro.

investments-since-brexit-currency-markets

Source: Financial Express Analytics

In the short-term, this has helped some larger UK companies, which trade overseas or in Dollars, to boost their share value as the exchange rates have helped their trading conditions. UK-focussed companies have taken a hit as they will no doubt find it more difficult to import goods as they become costlier. Consumers should start to see more expensive food and electrical goods if this trend continues.

Bank of England base rates

As mentioned above, the Bank of England reduced the base rate for lending to other banks to a historical low of 0.25%. This should encourage banks to lend more cheaply, and for the majority of consumers to spend more freely, especially using cheap credit. Of course, savers will see very low interest rates for their bank accounts. This may attract some to a cautious investment approach.

Our investment approach since Brexit

It may surprise you, but we did not make any changes to our investment strategy before the EU referendum, nor did we change it after the Brexit result. We heard anecdotal evidence that some financial advisers were pulling all of their clients into cash in the days before the result, or selling afterwards. What would be the point of this? Either you would have missed the recovery since the Brexit result, or worse you could have sold at the bottom of the investment markets. Since we cannot predict the future we stuck to our investment process and continued to diversify across a range of 15 investment sectors. Read more about how we approach Investment Management.

Here are some results since June 23rd to September 13th for our growth model investment portfolios. Individual client’s results will vary, and these figures are quoted before product charges.

investments-since-brexit-woodruff-financial-planning-portfolios

Source: Financial Express Analytics

As you can see the results have been impressive. In less than 3 months since the Brexit result, model portfolios have grown as follows:

  • Cautious model portfolio – up by 9.71%
  • Moderate model portfolio – up by 9.86%
  • Adventurous model portfolio – up by 9.11%

Bear in mind that these figures are not guaranteed to be repeated, and show what unusual circumstances we have experienced for investments since Brexit. Overall, you should be careful to read too much into the above results. The circumstances for investments since Brexit will not be repeated, so we now have to face further uncertainty in the UK economy. Generally, the above results show the value of diversifying your investments, and regularly reviewing your investment strategy. Just remember that we expect some choppy waters ahead as negotiations to leave the EU continue. This will no doubt have an effect on your investments when Brexit finally takes place.

What should you do about your investments?

If you have money invested, you should regularly review your results and the risks you take. We find that many amateur investors fail to regularly review their investments, and this can lead to nasty shocks when events like the Brexit vote happen. If you want an investment professional to examine your investments, why not contact us?

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Dan Woodruff

Certified Financial Planner & Chartered Wealth Manager at Woodruff Financial Planning
Financial Planning helps you to navigate and anticipate significant life changes. I want to help you to ensure your money is managed wisely to give you the financial security that will fund the future and lifestyle that is important to you.

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