Situation now facing markets is far from 'normal'

Over the last few weeks the stock market has fallen back from the peak it reached at the beginning of June

SUMMER is usually a time for optimism although the stock market is traditionally somewhat subdued at this time of year. Over the past couple of weeks we have seen the index slide away from the peak reached at the beginning of June. This is not surprising or indeed unexpected. Many market observers have been predicting a fall in the index for some time now.

This year the situation facing the UK and Ireland is far from “normal”. The overwhelming factor is obviously the on-going Brexit situation and the precarious political situation in which the UK finds itself. Clearly there is no quick fix for such complex situations and the minority government seems likely to limp on for now.

There is a growing feeling that “austerity”, particularly in relation to public sector spending, has been going on for long enough and the tide of opinion is definitely turning against continued restraint.

The pressure is increasing as we see a definite upturn in inflation eroding any increase in wages. So far consumers have resisted reining in their expenditure and this has continued to support economic growth. The household savings rate is now at a 50-year low and personal debt is ratcheting up in this unprecedented low interest rate environment. The real question is how long this can be sustained.

The conglomeration of challenges that face the UK now is surely reflected in its currency: the pound saw a “flash crash” in the immediate aftermath of the Brexit vote and although it has made up some ground since then and indeed is even up against the dollar so far this year, it is still trading at a significantly lower level than previously, confidence rocked once again after the general election.

The level of sterling in currency markets is reflecting what markets expect to happen going forward; in this case it is a clear indication that investors think trade will become harder for the UK's businesses and therefore demand for sterling has slackened as a result.

This has had some obvious benefits for equity investors: witness the surge in shares which have a high proportion of their earnings in dollars, for example.

Bearing in mind the uncertain situation the UK finds itself in, both politically and from an economic perspective, there is some logic in focusing on stocks which derive a high proportion of their earnings from overseas. This is surprisingly easy in the context of such a global index – the frequently quoted statistic of 70 per cent of earnings of the FTSE 100 companies coming from abroad aptly illustrates this.

Realistically it is impossible to predict the shape of a Brexit agreement – it is highly complex and unprecedented, but it is possible to make moves to insulate against some of this.

The most obvious is to avoid very domestically orientated stocks and indeed to increase overseas exposure within a portfolio. A spread of asset classes is another way of achieving greater diversification, although this, too, may be fraught with uncertainty as bonds are supported by the programme of quantitative easing and this is unlikely to continue indefinitely. We certainly live in interesting times.

:: Cathy Dixon is a director at the Belfast office of Cunningham Coates Stockbrokers, a trading name of Smith & Williamson Investment Management (SWIM). This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.


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