Monthly Archives: July 2016

Points of View: UK interest rates

Another week on and we continue to face more surprises following the UK’s vote to leave the European Union. Last Thursday the Bank of England (BoE) decided to keep interest rates on hold at 0.5%, despite strong expectations of a 0.25% cut.

No one knows the precise impact that Brexit will have on the UK economy, but the BoE has highlighted that business and consumer confidence has fallen significantly both before and since the vote. Specifically, data suggests that many businesses have frozen investment decisions and the fear is that this will lead to an economic slowdown and possibly a recession.

The rationale for an immediate cut in interest rates is that this would in theory mitigate any slowdown by encouraging spending and investment. So why has the BoE decided against such action? Essentially, it is on the basis that that the loss of confidence could prove temporary as the Brexit shock recedes. Nevertheless, the BoE has stated that it will do everything within its power to reduce the downside risks facing the UK and, unless there is some evidence that confidence is rebounding, a 0.25% interest cut seems likely in the coming months.

It remains difficult to predict how the economy will be affected by the Brexit vote, but unless rising inflation becomes a greater concern, the BoE looks set to keep interest rates “lower for longer” in the face of uncertainty. From an investment perspective, we would again highlight the importance of creating robust, diversified portfolios that are not overly sensitive to any one scenario in an uncertain environment.

http://www.nwbrown.co.uk/library/

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Points of View: Brexit Aftermath

It is now over a week since the historic vote for Britain to leave the EU and stock prices continue to be relatively volatile. It is interesting to see how investors have reacted to the result – the market is up, surprising many after the initial reactions to the result, although we have seen a pronounced polarisation of share price movements depending on the size and nature of businesses.

The FTSE 100 has broken through the 6,500 level for the first time since August last year and, as at the time of writing, has risen just under 3% since the close of business on 23rd June (the day of the vote). In comparison, the FTSE 250 has fallen approximately 7% over this same period. The outperformance of many of the larger companies that make up the FTSE 100 has largely been driven by their international nature. Unilever, for example, derives over 90% of its profits overseas but has a large cost base in the UK – it is therefore a strong relative winner from the post-vote sterling weakness.

Share prices of UK-focussed businesses, on the other hand, have been very weak and are to some extent pricing in the probability of a recession. Clearly, companies with earnings predominantly or entirely derived in the UK are more exposed to any slowing of the domestic economy and will also suffer from any increase in the cost of imported goods that arises from sterling weakness.

Volatility is likely to continue for some time until the implications of the vote become clearer. For long-term investors, volatility is a positive insofar as it can throw up interesting opportunities to buy good quality businesses at attractive prices.  The challenge for investors looking at UK-focussed businesses is in determining whether current prices are attractive compared to the likelihood or otherwise of a Brexit-induced UK recession.

http://www.nwbrown.co.uk/library/Points-of-View-Brexit-Aftermath