Market Outlook Report – September 2016

Post-Brexit – The Story so Far

Brexit has hit market outlook in UK

It has now more than two months since Britain voted to leave the European Union. The immediate reaction to the referendum on June 23 was fast and furious. The pound fell to levels not seen since 1985, world stocks lost $2 trillion, and the UK’s house builders lost 40 per cent of their value in two days. Economists and traders quickly slashed Britain’s growth prospects and jacked up inflation forecasts.

Since then, it has been difficult to determine whether such immediate market reactions were justified. However, the FTSE 100 is 10 per cent above its pre-Brexit result high and the more UK-focused FTSE 250 has recovered to be 3.1 per cent from its level before the referendum. The FTSE 100 hit a fresh one-year high last month, after the Bank of England launched its post-Brexit 3 –pronged “big bazooka”, which involved:

1. Halving the Bank of England base rate from 0.5% to 0.25% . This was the first change in the BoE Base Rate since March 2009 the lowest in its 322-year history;

2. A further £170 billion of quantitative easing (QE), the scope of which has been broadened to include the buying of corporate bonds as well as gilts; and

3. A new subsidised funding scheme for Britain’s lenders to boost lending and protect bank margins. The Term Funding Scheme (TFS) will give banks and building societies up to £100 billion of cheap money to ensure that the 0.25 per cent interest rate cut is passed on to the real economy. It effectively replaces the 2012 ‘Funding for Lending’ scheme, which has been used for about £60 billion and expires in 2018.

The Chancellor of the Exchequer, Philip Hammond, has promised to do what it takes to support the Bank of England’s stimulus package and shore up growth post-Brexit. Economists have raised concerns that the Bank is running out of tools and that the government may have to step in with fiscal measures, such as tax cuts and spending plans, to cushion the blow.

Apart from the pleasing performance of the stock market over the past couple of months, there have been other positive economic signals, which suggest that the UK is faring better than first feared. Examples include:

  • Growth in the second quarter, before the Brexit decision, came in at a forecast-busting 0.6 per cent.
  • Recent employment figures revealed that worries of a stall in hiring and the economy grinding to a halt were overplayed.
  • Business confidence has fallen by less than expected after Britain’s vote to leave the European Union, while shoppers have largely shrugged off Brexit.
  • Public finances reached a surplus in the month after Britain voted to leave the EU, due to the government earning more money than it spent, but the figure was still lower than expected.
  • Confidence among British households over their finances has bounced back after slumping following the Brexit vote.
  • Britain’s shoppers shrugged off concerns about the Brexit vote and hit the high street last month, causing retail sales to enjoy a rebound only a month after the referendum result.
  • The sales boost coincided with a poll which suggests that Britons think Brexit will make no difference to their personal finances over the next year.

In the light of all this recent positive news, have policy-makers perhaps over-reacted to fears of a potential collapse in the post-Brexit UK economy? Certainly, it hasn’t all been good news since 23 June, as reflected in the issues below:

  • At the time of announcing its post-Brexit 3 –pronged “big bazooka”, the Bank of England cut its growth forecasts for Britain by the largest amount on record. It believes that the economy will narrowly avoid recession but only because the Bank has taken unprecedented measures to bolster the economy. The Bank of England also signalled that rates were likely to fall as low as 0.1 per cent by the end of the year.
  • Britain’s Construction output fell 2.2 per cent in June compared with a year earlier, after a 1.6 per cent drop the previous month. Two consecutive quarters of decline means the construction sector has entered a recession for the first time since 2012. Annual output has fallen every month this year, causing concern that the weak performance in the sector signals a wider downturn.
  • Brexit has plunged Britain’s manufacturers into their most pessimistic mindset since the financial crisis despite order books remaining resilient after the vote to leave the European Union. The CBI’s Industrial Trends survey for July showed that factories were extremely concerned about their future prospects, without any immediate evidence to support those fears.
  • A business confidence index compiled by the ICAEW accountancy body fell from 0.8 in the second quarter to -10.2 in the third. A score of 0 is neutral. While the ICAEW said that confidence had since rallied, the rebound had only been “modest”. For the period of June 24 to July 20, the index stood at -27.7.

Based on the inconsistent news and forecasts, it is difficult to judge the real impact of Brexit and it’s certainly too early to gauge the full economic impact. In terms of forecasts, these are similarly inconsistent.

Credit ratings agency Moody’s expects there to be modest growth in the UK economy, with forecasts now looking more positive, just two months after the Brexit vote rattled markets. In its assessment of the global economy, the ratings agency revised forecasts for the UK and now expects GDP to nudge up 1.5 per cent in this year and 1.2 per cent in 2017. Previously, it had estimated the UK economy to grow 1.8 per cent in 2016, and 2.1 per cent next year.

moody's growth prediction

Credit rating agency Moody's predicts modest growth in UK GDP this year and next

These findings come after the National Institute for Economic and Social Research predicted the British economy would decline by 0.2 per cent between July and September this year. NIESR also warned there is an “evens” chance of the UK dipping into a recession by the end of 2017.

Moody’s expected “limited” Brexit-related spillovers into the euro area. However, they predict some deterioration in the eurozone and maintain their growth forecast at 1.5 per cent for 2016 and 1.3 per cent next year. Moody’s Investors Service stated growth in advanced economies will remain at low levels, but will be stable.Finally, Lloyds Bank, which looked at the levels of investor confidence in the UK, saw that positive market sentiment was bouncing back after Brexit, with fewer people taking shelter in “safe haven” assets.

As we at Reeves Independent continue to monitor the UK & global economic developments and the constant publication of forecasts and surveys of consumer confidence and business sentiment, we are pleased with our investment strategy to date and the results for our clients. We have maintained a cautious and balanced approach to our pension investment portfolios and have been in the right position to weather the immediate Brexit vote shock and participate in the subsequent stock market recovery.

With £1.2 trillion held in current and savings accounts, savers and pensioners will bear the brunt of current record low interest rates. Savers face five more years of record-low returns, with investors betting that the Bank of England will not undo last week’s interest rate cut before the end of the decade. Reeves Independent clients however are experiencing far better investment returns and by continuing to pursue a proactively managed investment strategy, we intend to produce similar results going forward.​

​Investment Performance Summary of Reeves Independent Managed Pension Balanced Portfolio

Name Weight
Total Return
3 Month
Total Return
1 Year
Total Return
3 Year
Total Return
5 Year
Fidelity Global Technology W-Acc-GBP 1.66 32.23 41.40 22.55 23.39
AXA Framlington Global Technology Z Acc 1.66 26.18 33.69 20.98 21.20
Henderson Global Technology I Acc 1.66 24.52 35.67 19.10 19.55
iShares US Property Yield 4.00 22.88 37.10 22.71 19.72
AXA Framlington Biotech GBP Z Acc 2.50 21.75 -5.69 20.47 32.30
iShares Core S&P 500 1.88 20.15 28.20 18.78 21.85
Fidelity American Special Situations 7.50 20.13 28.47 19.61 23.16
JPMorgan European Smaller Comp Ord 1.66 19.98 33.58 17.18 17.93
SchroderUS Mid Cap Acc 1.88 19.58 22.38 17.96 20.64
Jupiter North American Income Acc 1.88 19.33 27.56 14.87 18.75
Legg Mason IF CB US Eq A Acc 1.88 18.47 24.04 13.32 18.52
Schroder European Sm Cos Z Acc 2.50 17.45 21.97 14.77 17.58
Schroder Global Real Estate Secs Z Acc 4.00 16.81 26.56 14.21 13.97
Threadneedle Eurp Sm Cos Ret Z GBP Inc 2.50 16.54 30.46 14.55 18.27
AXA Framlington Financial Rl Acc 2.50 14.76 7.00 7.38 12.64
Jupiter Financial Opportunities Inc 2.50 13.35 6.75 7.62 12.37
Lazard European Smlr Coms Retl C Acc 2.50 11.95 22.09 17.75 20.33
Liontrust Special Situations I Inc 5.00 11.87 20.62 11.61 16.41
Investec Cautious Managed I Acc Net 5.00 7.85 10.08 3.73 6.34
Baillie Gifford Shin Nippon Ord 1.66 6.73 32.91 22.71 24.85
GCP Student Living Ord 1.00 6.22 13.88 17.12 N/A
Tritax Big Box 1.00 5.94 13.81 N/A N/A
Empiric Student Property PLC 1.00 3.33 8.80 N/A N/A
MedicX Ord 1.00 2.29 10.65 13.84 10.73
Target Healthcare REIT 1.00 -0.20 9.32 8.31 N/A
JPMorgan Mid Cap Ord 1.66 -0.50 0.85 12.19 20.95
CASH 32.02
Summary 100.00 15.14 19.03 15.14 18.75
Benchmark:FTSE AllSh TR GBP 13.23 10.43 6.47 11.27

Funds ranked in descending order, based on 3 monthly performance figures.

​UK Inflation

Rising prices at the petrol pump helped to push up inflation to its highest level in nearly two years, according to the first set of official figures after Britain’s vote to leave the European Union. Economists believe that a rise in the cost of everyday goods and services last month marks the start of a period when inflation will pick up rapidly after a year of hovering around zero per cent. This is because the slump in the value of the pound since the Brexit vote will make imports more expensive, which is likely to lead to supermarkets, manufacturers and businesses passing on those higher costs to consumers. The consumer prices index, used to measure the headline rate of inflation in the UK, rose by 0.6 per cent in the year to July, the highest since November 2014, according to the Office for National Statistics (see graph below). Economists had been expecting inflation to stay at June’s level of 0.5 per cent.

Graph of UK inflation for 5 year period to July 2016

UK inflation has been steadily trending upwards

Consumer prices in the UK increased 0.6% in the year to July, the first month after the UK voted to leave the EU, following a 0.5% rise in June and beating market expectations of a 0.5% gain. It was the highest number since November of 2014 boosted by rise in the cost of transportation, alcohol and hotel and restaurant. Inflation Rate in the United Kingdom averaged 2.60 percent from 1989 until 2016, reaching an all time high of 8.50 percent in April of 1991 and a record low of -0.10 percent in April of 2015. Inflation Rate in the United Kingdom is reported by the Office for National Statistics.

FTSE Mid-Caps

The FTSE 250 is a weighted index consisting of the 250 companies ranked 101st to 350th of the largest companies listed on the London Stock Exchange. Promotions and demotions to and from this index take place quarterly in March, June, September and December. The Index is calculated in real-time and published every minute. Related indices are the FTSE 100 Index (which lists the largest 100 companies), the FTSE 350 Index (which combines the FTSE 100 and 250), the FTSE SmallCap Index and the FTSE All-Share Index (which is the aggregation of the FTSE 100 Index, FTSE 250 Index and FTSE SmallCap Index).

The FTSE 250 is seen to be a better, more accurate barometer of the UK’s economy, compared with its ‘big-brother’ the FTSE 100. The FTSE 100 has always been the alpha male - he knows about stuff such as mining and big banks and will smugly tell you why you have got a bad deal on your currency exchange before a holiday. The blue-chip man tends to see Britain as home but spends most of his time abroad and, most importantly, likes the limelight.

The FTSE100 is the alpha male, but not such a good barometer of the UK economy

The FTSE 250, on the other hand, has always been known for just getting on with it, not one to like making too much of a show. Yet like all good British stereotypes, it also disappoints at the most vital moment.

The mid-cap index has recently risen to a new high, approaching 18,000. This should be seen in the context of the June 23 (Brexit vote) close of 17,333.50. In particular, it was boosted by the UK’s better-than-expected GDP growth in the second quarter.

That’s a remarkable recovery for what is one of the better barometers of the UK’s economy. You may remember smug types saying it did not matter what sort of recovery the FTSE 100 was staging, it was all about its wider, UK-focused cousin. That is true and it is the smaller index that tends to take the brunt of any pain when there is a hint of a consumer downturn, as it is the one that holds the estate agents, banks such as Virgin Money and Metro Bank, and retailers including Halfords.

Volumes typically tail off over the summer and, although Brexit and huge monetary stimulus programmes have piqued interest this time, the City's big decision-makers tend to be out of town, on holiday. Their juniors in the hot seat certainly won’t be making major market calls while the boss is baking in the south of France.

Chief executives say as much. Recent outlook statements during reporting season are littered with references to "caution" and "too early to tell". This means further volatility. But UK interest rates will stay low for years and governments will keep propping up markets as long as they can. Income-seekers have been chasing yield since the financial crisis stripped interest rates away to almost nothing. Savers bothered to get the best return on their money also switched into equities. Brexit and the latest cut in borrowing costs - expect another trim in a few months - plus further monetary stimulus only underpins the argument for share buying. Also, the weak pound means overseas earners still look a decent bet.

Finally, according to financial experts such as Jonathan Miller, the head of manager research at Morningstar, the fund research group, there is plenty left to come from stocks outside the FTSE 100. This is encouraging news for our core holding in the JPMorgan Mid Cap Investment Trust Plc, which invests in the more domestically focused medium-sized UK companies that make up the FTSE 250 Index.


gold ingot

Gold is often viewed as a safe haven from troubled markets

Brexit and the global spread of negative bond yields sparked the biggest investor stampede into gold of any first half on record. Investment demand hit 1,064 tonnes in the first six months of this year, with overall gold demand, which includes spending on jewellery, hitting its highest level since the depths of the financial crisis in 2009. There was clearly an appetite for Gold during the first half of this year, in the face of Brexit uncertainty, negative global sentiment and expanding global negative bond yields. In terms of current/future prospects for Gold, it is losing its attraction (as a safe haven) as the U.S. stock market (and other global markets) regain their confidence and the dollar strengthens. Therefore, the Gold price is currently viewed as a “rally losing steam”.


The big issues affecting the Dollar are the US economy and the next change in interest rates. Current thinking is that the US Fed is likely to raise interest rates in December, after the November 8 presidential election, according to a Reuters poll. This is reflected in recent comments from San Francisco Fed president John Williams, which suggested a US interest rate increase this year was still a real possibility, as inflation pressures grew. The prospect of an increase in US interest rates is supporting the dollar.

Longer term, some are looking the potential of the euro competing against the US dollar to become a major (dominant?) international currency. This would be a major challenge to the dollar if more countries move away from managing their exchange rates with the dollar as a benchmark and instead adopt euro-based anchors or baskets in which the euro figures strongly. If the euro replaces the dollar as the leading international currency, this will have a significant impact on the status an value of the US dollar.

The US dollar is forecast to subside against both the pound and euro over coming months according to the latest forecasts issued by Denmark’s Danske Bank, who are well regarded for their currency forecast track-record. Danske believe that money markets are underestimating the likelihood of an aggressive interest rate raising cycle at the US Federal Reserve over the course of the next year and are therefore overestimating the future strength of the dollar in the belief that interest rates will remain lower for longer.

Recent week employment figures have pushed the first interest rate increase out from July to December. The markets appear to be pricing in a significant probability of a US recession in 12-18 months’ time – “too high a probability in our view,” say Danske, underlining their belief that US interest rates will increase sooner than many expect.

The GBP to USD exchange rate, currently £1.29/US$1, is forecast to rise to 1.47 in September 2016, £1.54 by the turn of the year and £1.57 by June 2017.

With regards to the EUR/USD outlook, don’t expect any fireworks in this market say Danske. Rather, look for a gradual strengthening of the euro. The EUR to USD exchange rate, currently €1.11645 , is pencilled in for September, 1.14 for December 2016 and 1.18 by June 2017.


Oil prices initially enjoyed a recovery during August, rising to the highest level this month on the back of growing speculation about action by Opec to support prices. The price of oil rose to its highest level in six weeks, briefly trading at more than $50 following on from evidence of a decline in US oil stocks. The price of a barrel of Brent crude, the international benchmark, rose 37 cents to $50.22, its highest since July 4. That represented an increase of more than 20 per cent since early August.

However, oil prices subsequently dropped back beneath $50 a barrel, as signs of increasing production took the heat out of last month’s rally. A ceasefire in Nigeria, increasing exports from Iraq and dwindling hopes that a production freeze will be agreed between Opec members and others such as Russia, saw the price of Brent crude fall almost 3 per cent by lunchtime trading in New York to $49.38.

Given the inherent volatility of oil prices and erratic market forecasts, only brave, confident and risk-tolerant clients/investors should hold a position in oil, as with any single resource asset-based investment (like gold and other commodities). For most private/retail investors, we would always suggest the relative protection of a well-managed collective investment fund, which will diversify risk (albeit within a narrow market sector) and be constantly and professionally managed. We would be happy to discuss such options, if you have an appetite for such investments.

Technology Funds

The technology sector was amongst the best-performing equity sectors over the last three and five years. However, there have been some large swings, with a low reached in February this year, only for the market to then recover that lost ground. Amid an uncertain economic backdrop, this sector has continued to outperform the wider market.

Recent analysis by Charles Schwab (which focussed on information technology) recognised that the global technology sector took a hit following the UK vote to leave the European Union, which is now viewed in retrospect as a kneejerk response and should have been viewed as a potential buying opportunity. Consequently, the sector has seen a healthy rebound over the past month. Looking forward, Charles Schwab point to the buoyant innovation and entrepreneurial spirit that currently pervades the technology sector, on the supply side. On the demand side, Charles Schwab point to increased technology spending to improve productivity levels and to increase technological automation to mitigate wage increases (such as raising the minimum wage and National Living Wage) and other employer costs (such as Auto-Enrolment in Workplace Pension Schemes).

Charles Schwab also suggest there is evidence to show that companies have underinvested in technological improvements during the past several years. Clearly, this trend cannot continue indefinitely, and now seems to be the turning point where companies that want to remain competitive in this global environment are upgrading systems and equipment.

Balance sheets in the information technology sector in particular appear solid, with large cash balances and relatively low debt. This presents an ideal time to pursue mergers and acquisitions in order to grow successful businesses, remove competition and consolidate expenses. Finally, it has been observed that tech sector companies have been increasing their dividend payments, which may become a larger part of total equity return in the near term, while they have also increased share buybacks, which reduces the volume of available shares and therefore bolsters market price.

Although Charles Schwab acknowledge increased global competition and residual signs of delayed capital expenditure in some quarters, they remain confident about its future and maintain their ‘outperform’ rating.The recent strong performance of the technology sector is reflected in the following performance chart:​

Performance chart of technology and telecoms sector

​Reeves Independent portfolio management clients have benefited from this strong performance, not only because of we have exposure to this sector, but because we have wisely selected the specific funds in which to invest. The three technology funds currently held within the Reeves Independent Balanced Investment Portfolio are currently ranked 1st (Fidelity Global Technology W GBP), 5th (Henderson Global Technology I Acc) and 7th (AXA Framlington Global Technology Z Acc), in the 14-fund Trustnet IA (Investment Association) Unit trusts & OEICs Technology sector, based on the past year’s performance:

There are slight variations in the 1 year performance stats in the table above, compared with the Reeves Independent Static Model Balanced Portfolio stats table, as they were produced on different dates.

​In terms of the sector-leading Fidelity Global Technology fund, it has been is solely managed by HyunHo Sohn since October 2013. Previously, he had been co-manager since March 2013 and his involvement with the strategy dates back to 2011, when he was conducting research on global technology stocks. ‘Value-chain analysis’ is the cornerstone of the manager’s investment process, in which he buys companies that he believes are best able to profit from a particular product’s life cycle, from those producing component parts right through to those selling the finished product. Although not unique, this research-intensive process is an interesting approach that is measured, systematic and methodical. It has certainly generated enviable performance results to date and some of these profits will be crystallised and reinvested elsewhere.

Absolute Return Funds

In recent times, investors have been pouring money into absolute return funds — £6 billion this year so far. It is one of the few asset classes to gain traction as economic uncertainty and low interest rates spur people to look for alternative investments.

The Investment Association (IA) definition is enticing —“funds managed with the aim of delivering positive returns in any market conditions”. However, it is worth noting that, as is the case with all investments, nothing is guaranteed. The name doesn’t help — it gives investors greater confidence than they should have that there won’t be losses.

The IA changed the name from “absolute return” to “targeted absolute return” funds three years ago to get away from the notion that returns were guaranteed. The name remains misleading when the positive return may be “just greater than zero after fees”.

To try to ensure a return fund managers employ tactics including investment in multiple asset classes — bonds, currencies, equities, commodities — and multiple sectors. They adopt strategies including betting on investments rising (long selling) and falling (short selling). When this approach is combined, it is known as a long-short strategy. This has resulted in a disparate group of funds being lumped together in one asset class.

fca are set to investigate absolute return sector

Of growing concern is the fact that absolute return funds have been dogged by allegations of under-performance and high fees. This has been compounded by the recent news that the Financial Conduct Authority (FCA) is to investigate the sector.

The FCA is looking at the sector as part of its asset management market study. The review, launched last year, will look at whether funds operate competitively and to the benefit of retail investors. Preliminary findings are expected to be announced at the end of the year, with a full report in 2017. The FCA may have been spurred to act by reports of poor returns and inflated performance fees in the absolute return sector, and the large amount of investors’ money being deployed.

Of the 66 funds listed on the analyst website FE Trustnet, 31 have lost or made no money so far this year. The biggest losers are FP Argonaut Absolute Return, which is 22.2 per cent down, and City Financial Absolute Equity, which is 19.9 per cent down. However, it is only five — of the 50 with a three-year record — that have failed to deliver a return. The cumulative performance across the sector according to the Investment Association (‘IA’) is 0.2 per cent over the past year, 7.2 per cent over three years and 15.1 per cent over five years.

The investment analyst Morningstar says that some of the funds benefiting most from cash injections are those that are failing to deliver, including the Aviva Investors Multi-Strategy Targeted Return fund, which lost 1.3 per cent in the first seven months of this year while gaining more than £1.2 billion from investors over that time.

Some have criticised funds for being complicated. The investment adviser SCM Direct recently asked whether “Einstein would understand the Standard Life Global Absolute Return Fund”. The fund, one of the largest, with more than £26 billion under management, lost £400 million between April and June because investors withdrew their money when analysts rated it as underperforming.

Performance fees, which can be hidden in the small print, are often charged at a whopping 20 per cent of outperformance for beating a very low benchmark such as Libor [London Interbank Offered Rate] — which stands at 0.5 per cent a year.

In many respects, Absolute Funds are the retail-facing version of the hedge-fund industry, and many have inherited some of the excessive fees from that industry, with performance fees and low-performance thresholds. These performance fees, when combined with high annual fees, have led to questions about value. Of course, and as alluded to above, not all Absolute Funds are the same.

There are funds that have delivered notable returns in the past year: Schroder’s European Absolute Target has given investors a 19.3 per cent return; Threadneedle Target Return returned 11.8 per cent; Newton Managed Targeted Return achieved 11.8 per cent and Jupiter Absolute Return managed 10.9 per cent. Clearly, the Absolute Return fund category consists of a disparate group of funds trying to achieve different things, with varying levels of risk. It’s therefore critical to dig into fund profiles before investing. Simply comparing performances with a sector average is not enough and can be very misleading.

On balance, Reeves Independent don’t have a keen appetite for Absolute Return funds at present. We would rather proactively research and select the best specialist sector funds, with respected investment management pedigrees, commendable performance records, promising prospects and reasonable charges.

UK Property Funds

commercial property investments have been revalued post brexit

Commercial property investments in the UK have been revalued post-Brexit

As commented on in our previous Market Outlook, one area of concern is the move by a number of UK property fund managers to change the charging structure, impose ‘Fair Value Adjustments’ or even suspend trading of their unit trust/OEIC funds. These moves have been in response to net outflows due to a surge in redemption requests caused by worries about the fate of their property funds and the tumbling price of the pound.

Large-scale outflows cause problems for commercial property funds because they are based on assets that are difficult to sell quickly when investors want their money back. Restrictions on withdrawals are then put in place to give fund managers time to sell their properties. Otherwise, they would be forced to sell assets at fire-sale prices to fund the redemption requests. That would drive down the fund’s value, encouraging more investors to cash out, creating a vicious circle.

We have therefore been taking a fresh look at property fund opportunities, and the best performing property funds recently have been global funds, as opposed to UK-specific funds, and focussed on commercial property, as opposed to residential property.

The REITs that we currently hold in our investment matrix are specialist funds, focussed on specific sectors such as student accommodation and healthcare. Of the other property funds in our current investment matrix, again the focus is overwhelmingly on the commercial property sector.

What Next?

If you would like to set set up an informal chat to discuss how Reeves might help you protect and grow your portfolio please contact us on 0800 989 0029 or e-mail to arrange an appointment.

Sources: We gain our information from a range of sources including seminars, webinars, industry publications and general media comments.