With Spring upon us the early part of 2017 has been more settled for the investment world than many had thought. Donald Trump is the leader of the free world, the flag bearer of global free trade is China and the French electorate are likely to have to decide between a far right candidate and a newcomer to politics with no established party.
We live in a much changed environment. RBS are reporting that in the last 7 years the number of transactions in branches has nearly halved whilst online transactions have increased by more than 400%. Italy is in top spot in the Bloomberg Global Health Index and Article 50 is now a reality.
In stock markets the FTSE 100 has benefitted significantly by the fall in the pound. In 2013 when David Cameron announced his intention to call a referendum sterling was at $1.58. Its recent trading range has been $1.22 to $1.25, a fall of circa 20%, there has been a similar fall against the Euro. With it estimated, between 70% and 80% of FTSE 100 companies’ earnings being made in overseas markets, when profits are brought back to sterling, this major currency boost inflates the profits. This has helped boost the FTSE 100 to around 7300.
UK based investors with holdings in investment funds which own assets in overseas markets, have similarly benefitted when those assets are valued back to sterling. Therefore the question is what are the chances of the pound strengthening and denting profits?
Generally a currency strengthens when amongst other things, there is political stability, a strong economy performing better than others and rising interest rates. At present we have political and economic uncertainty surrounding Brexit, the main drivers of economic growth in 2016, i.e. consumers, facing pressure from rising inflation and low wage growth and the BoE more concerned about stalling the economy by rising interest rates than their concern about rising inflation, so there seems to be little prospect of sterling surging back to the levels of 2013.
During the summer of 2016 the yield on most developed world government bonds reached historic lows. Over a 30 year period interest rates had been falling as well as inflation and the advent of QE after the 2008 financial crisis pushed yields even lower, indeed to negative levels if you were lending your money to the German, Swiss or Japanese governments.
Since then the concern about the inflated price level of these bonds has resulted in many bonds’ values moving lower, whilst of some concern to us, should not have a major effect for Save & Invest client as with our approach of having a wide range of flexible and diversified funds at the heart of our clients’ portfolios we believe our strategies need not be altered. As always however with a changing environment there are likely to be reasons for some alteration to the mix of funds in portfolios.