This year has been a real roller coaster ride for investors and savers alike, and the Brexit vote was a real shock both politically and financially. For investors and savers, it raised so many questions about the potential economic outlook for UK plc as we set off into totally uncharted waters.
The big question was and still is what effect the result will have on both fiscal and monetary policy. This is further exacerbated by a sudden change of prime minister and a new resident at the Treasury responsible for managing an orderly and considered exit from the EU.
We should be under no illusions that the outcome of the vote on June 23 is anywhere near being clear: the political shenanigans involved will run for some time to come and the outcome is far from clear.
Unfortunately, it is this uncertainty that equity markets are most troubled by, and the manifestation of this uncertainty comes in the form of volatility and whipsaw shape graphs of stock prices.
Brexit threw the UK financial world into turmoil: markets fell quickly as a contagion panic ran like wildfire and the UK pound nose-dived about 10 per cent, and the result was at one time a 31-year low value against the dollar.
Understandably many investors and savers alike have been forced to re-think their strategies when looking for income. Capital growth or capital preservation and stability? Or both?
An obvious consequence of the UK investor heading for more safe homes for their capital has been that gilt yields declined. What is more, yields on UK credit have slid back. To make matters worse, the global ratings of the UK economy have been downgraded from previous triple-A category.
The reason given by the ratings agencies was twofold. First, that the economic GDP projections for the UK were likely to be less than previously thought. Second, the political upheaval would inevitably create further uncertainty and negativity.
As we move through the final quarter of the year, those comments by the ratings bodies look particularly telling.
Traditionally in times of great political upheaval and market turbulence, investors have attempted to adopt a defensive position by favouring bonds, gold, infrastructure, healthcare and consumer staples.
The problems they face taking this approach are very challenging. First, the interest rate environment has not changed as many people have been consistently calling; the Bank of England has remained steadfast and maintained this record period of below average base rate.
The knock-on effect for savers is of course that their deposit capital is effectively yielding in negative territory when compared with inflation on the cost of living. Although it is still very benign, inflation is still with us. Since the Brexit vote and the slump in currency value of the pound, it is not going to take long for the increased costs of importing raw materials and food to start to bite and provide some inflationary pressure.
So what does the future look like for investors and savers who are increasingly under pressure to squeeze out yield – particularly so in the case of an ageing population who need to maintain income levels.
