This week the UK stockmarket reached an all-time high. For this to occur post a Brexit leave vote was, in all honesty, not on anyone’s radar. The simple explanation for the rise in the FTSE 100 index is that the majority of the companies that make up the Index derive a significant amount of their revenues from overseas and the plummeting pound has given those earnings a significant boost. However, the same does not hold true for the next 250 largest companies listed on the UK stock exchange and for the smaller companies foreign earnings play a much less significant part. Yet this week, it was not only the FTSE 100 but also the FTSE 250 and the FTSE Small Cap indices that reached all-time highs, so the foreign earnings argument is clearly too simple.
Better than expected UK economic data has certainly played a part but another contributing factor is likely to relate to an expectation of lower interest rates for even longer. Now when it comes to predicting interest rates, analysts are about as good as those that predict stock markets but there could be a link.
At the end of last year interest rate analysts were expecting UK base rate to be at 1% at the end of this year. By 23 June they had cut their forecasts to below 0.6% and two weeks later they had almost halved their expectations again. It now looks almost certain that Bank of England Base Rate will be at, or below, 0.25% at the end of this year and beyond.
Amongst many other implications, this means that income seeking savers face an even bleaker future and some suggest that this contributed to the recent stock market rise. Rather than investing in deposit accounts or bonds, savers are now turning to the dividends of companies to provide the level of income they require and this leads to increased demand for shares, which in turn pushes up share prices.
Obviously this is a very simplistic theory that, at best could account for small contribution to rising markets and there are, in reality, many factors at play and no individual or institution has a handle on all of them or what happens next.
So far, Brexit has apparently been positive for investors. Whilst there will be a rollercoaster ahead it’s just possible that the whole thing could turn out in the UK’s favour over the medium to long-term but the reality is that it will be impossible to predict what factors will play out well for us until after the event.
One thing that does however look certain is that those relying solely on deposit accounts to protect their capital are likely to suffer. Whether they know it or not, most savers have lost money in real terms over the last eight years. Not only has the eroding effect of inflation been greater than the benefit of interest added to accounts, meaning that spending power has gone backwards, but those who haven’t benefited from increased wealth through exposure to the equity and wider markets are now relatively worse off than those that accepted some more transparent risks.
Whilst we at Lowes are amongst the first to admit that we don’t know what the future holds, our unique investment strategy has stood the test of time through periods such as 1974 and 87, 2001–03, 2008-09 and thus far since the Brexit referendum. We retain a watching brief on the markets and whatever happens next we will be sure to treat our client’s investment capital in the same way that we treat our own. No one wants to lose money but we know that we need to accept some risk in order to make returns better than cash over the medium to long-term and we’re looking to get those risks suitably rewarded.