As we have said in previous commentaries, the period of strongly rising assets, powered by Central Bank Quantitative Easing, has generally passed but it appears the change to more normal conditions will be much more gradual than anticipated a few months ago, reducing the concerns in the gilt and bond markets and supporting economic growth in most leading economies. This allied to the more positive engagement between China and the USA on trade in recent weeks, should signal a return to modest portfolio growth and continued low interest rates.
However, a major factor for us in the UK, will be how the pound reacts to whatever Brexit outcome emerges and that, at this stage, is well-nigh impossible to predict. Since the Referendum, portfolios with international content or UK equites with overseas earnings, have benefited as the pound fell sharply and these returns were expressed in Sterling in portfolios. Similarly, as the pound strengthened at the start of the year, these same holdings would have been dragged down, despite nothing intrinsically having changed, just the currency.
How the final Brexit solution is interpreted by the currency markets, is likely have the most significant impact on portfolios this year and will probably be the cause of most of the volatility we will experience. It has been predicted a hard or disorderly Brexit will cause a run on the pound, but we cannot know if this will be the case, as a hard Brexit may already be reflected in the current value of Sterling. Knowing how the pound will react is as easy as knowing what will happen on 29 March, at this stage it is not possible.
Whatever direction is taken by Sterling, it will eventually settle in the post Brexit world, when the real levers of investment returns, economic growth, inflation and interest rates return to their rightful place. Multi asset managers are adjusting their portfolios where they see advantage and focusing, as is their remit, on the medium to long term. Our advice is to expect volatility and look forward to the time Brexit is no longer the driver of uncertainty. Sit tight is our message.