The Brexit fallout is still being described in apocalyptic terms, but with any great change there is also opportunity.
Few advisers will have been surprised by the market volatility since Brexit, but they will have different views on how to tackle this. The most optimistic argue that the uncertainty provides an opportunity to reignite the financial services sector and bolster certain aspects of it. Others argue that, actually, investors and savers may do well even if the economy doesn’t. However, it is clear that there are structural issues that have needed addressing for some time.
Pension funds always hold government bonds and yet they yield almost nothing. Usually, if a currency falls in value a central bank will ratchet up the interest rates to hold inflation back. This increases the value of government bonds. Of course, our government is doing the opposite. It is injecting more money into the economy and reducing interest rates, which forces the yields even lower. I think we should radically reconsider the way portfolios are structured as a result.
The plunging gilt yields have also caused pension scheme liabilities to soar. Pensions are at breaking point and this will force a long-standing problem out into the open. How do we balance the interests of shareholders with retirees and a workforce of various ages? Final salary pension schemes are demanding more money than is available.
It is also important to remember that although the economy could possibly head towards a recession, stock market returns are not correlated to GDP growth. Investors with diversified portfolios are relatively well protected from this. Bigger companies in a stock market tend to do well during times of economic difficulty; they consolidate and pick off the weaker companies in their sector. Many of these companies are international and exposed to variety in this sense. Most investors hold shares in bigger companies such as those on the FTSE100 and these still look strong.
Similarly, the weakness of the pound is good for investors in the economy as well as exporters. This can afford opportunities for savvy investors. And there were many intractable problems with the EU, perhaps jumping ship earlier was better than later. It gives us an opportunity to form independent trade deals before other members leave and start to do the same.
Brexit has happened and we need to move on and deal with it rather than looking backwards. What we need now is positive and confident leaders – where there’s confidence the markets respond. As advisers, we can provide the same confidence to our clients. There is a lot of negative commentary at the moment and it is unwarranted, no-one knows what’s going to happen or what sort of trade deals the government will secure .
The FTSE is higher than it was six months ago and it has varied a lot over the last ten years. That’s the nature of the stock market. With all this considered, I think it’s important to inject confidence into conversations with clients because there is every reason to be cheerful.
Craig T Gibson, Managing Director
AGL Wealth management Ltd
0141 348 7710