Investment Newsletter September 2016
Topsy-turvy times We have often noted that in today’s topsy-turvy investment world, bad news is frequently better for your investments than good news! This is because central banks around the world have become the key driver of markets. Poor economic news can often mean central banks act to stimulate the economy perhaps by cutting rates or delaying hikes, or carrying out quantitative easing (QE).
Mike Deverell Investment Manager
UK investment markets since the referendum are a great example of how economic concerns do not necessarily feed through into asset markets. Gilts traditionally do well when the economy is perceived to be poor, as they are guaranteed by the government. The potential long term returns might be lower but they are seen as a safe haven, and with many people worried about the UK economy their prices rose sharply in the wake of the referendum. Gilts also do well when interest rates are being cut as the Bank of England felt compelled to do in August. Their
new round of quantitative easing has also helped push up prices, exactly as it is designed to do. Essentially, QE works by the Bank printing money and using this to buy bonds, pushing up the price which pushes down the yield. This is supposed to cause investors to take profits and invest the money elsewhere, hopefully stimulating the real economy. Stockmarkets have done well partly because low bond yields and low rates make their earnings and dividend yields look better by comparison. UK stocks have also been especially strong as a result of the fall in Sterling – again a reaction to perceived economic weakness. As the pound falls, so the profits of the UK’s large multinationals rise in sterling terms since most of their money is made overseas. This has helped to push up the UK stockmarkets. This is great news for investors and so we have seen some really pleasing performance over the past few months.
Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Conduct Authority. Equilibrium Asset Management is entered on the Financial Services Register under reference 452261. The FCA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission.