You are going to have some worried clients this week. Not all of them of course; many will take the view that investing is a long game and they do not need to worry about short-term volatility, but some will be worried all the same.
There will be others who see any kind of volatility in the markets as a buying opportunity, and rightly so. But even these seasoned investors may wonder what the best course of action is, because when the UK Prime Minister Theresa May triggers Article 50 of the Lisbon Treaty on Wednesday 29 March, the world as a whole – not just the UK – is entering uncharted territory.
Whether you voted to remain or leave is now largely irrelevant, we are leaving and the process, which is set to take two years, is now getting going. So, what does this mean for you and your clients?
Well, if any of us had a crystal ball and could predict the markets, we would already have enough money to live on and not need to work. Sadly, this is not the case, so the best we can do is offer experience and analysis to provide clients with what is, in reality, our best guess. Of course it is an educated guess based on what we have seen happen in difficult situations before, but given no one has been through this process yet, there is no telling exactly what will transpire for the markets.
The pound has already seen its value plummet from €1.42 (£1.22) in November 2015 to as low as €1.10 in October 2016, and at the time of writing it was hovering at €1.15 to the pound according to data from currency specialists Moneycorp. The latest boost to the pound came from inflation figures that showed the UK has a rate of 2.3 per cent for February – up from 1.8 per cent in January – and smashing through the Bank of England’s target of 2 per cent. This inflationary pressure, which many economists expect to rise to 3 per cent, but the Bank of England expects to peak at 2.8 per cent, is increasing the calls for a base rate rise to be put in place. The UK’s base rate has been at record lows since 2009.
While the pound has struggled, the share indices conversely have had a huge rally in recent months reaching record highs, but it appears this particular bubble may be bursting. On Tuesday 21 March, the S&P 500 and the Dow Jones posted their biggest one day losses since October 2016, as they fell more than 1 per cent through the day, and this filtered through to the FTSE 100 and the FTSE 250 the following day, when both also fell by around 1 per cent.
Now, much of this has been driven by losses on Wall Street as investors in the US seem to be losing faith that President Trump can deliver on the tax cuts he had promised on the campaign trail. The idea that he was to embark on a tax-cutting and infrastructure-spending plan gave what has been called the ‘Trump trade’ a real boost. But as the new President struggles to deliver on his proposed changes to healthcare in the US, which many Republicans already agree on, the idea that a quick delivery on any of the more complex areas such as tax and banking reform is looking less likely.
Therefore with the malaise currently hitting the US markets already having an impact on the world indices, the triggering of Article 50 is likely to add to the uncertainty and volatility. Since the vote to leave the EU on 23 June 2016, UK markets have rallied by around 16 per cent, but with the uncertainty due to follow the triggering of Article 50, it is not going to be easy to tell investors what to do for the best.
However, Deutsche Bank has advised its clients to short the FTSE 250 and go long with the FTSE 100. This is largely due to the fact that the bank expects the pound to fall further after the starting gun to Brexit is fired on Wednesday, which could hit the FTSE 250 – largely made up of UK companies reporting earnings in pounds – harder. The FTSE 100’s composition of primarily international companies, with 60 per cent of sales coming from outside the UK according to Deutsche Bank, are likely to suffer less as a result of a hit to sterling. In fact, they tend to perform better when sterling struggles.
So helping clients understand the best way to protect their portfolios for the coming months is not easy, but an early assessment of where they are and ensuring a diversity in asset classes, geographical spread and sector spread is likely to help them weather the storm. We will just have to wait and see how damaging that storm is going to be.
Alison Steed is a freelance journalist
