History is being made whilst we watch!!!!

At 45 years of age I feel I have lived and experienced enough, having started my career in the military in 1986, then seeing serious humanitarian tragedies in conflict zones. And now, having managed client assets as an Independent Investment Manager for a further 20 years, experiencing different stresses in Black Wednesday, the Dot Com Bubble (and collapse) and most recently the global financial meltdown in 2008.

My experiences no matter how different or awful, were all moments in history that came and went, with little attention paid to them as regards to how they permanently changed the future. That is not true today, because the decisions surrounding the UK and Brexit will impact the future of the UK as a whole, as we change the country’s relationship with the rest of the world.

History will therefore have a great deal to say on the decisions made today and in the coming 12 to 18 months as we negotiate with Europe, there is much to win and lose. By the time this article is published, Theresa May will have triggered Article 50 and sterling will likely have capitulated further and may have breached levels not seen for a generation potentially hitting lows never seen.

How Low Could Sterling Go against US$ and Euro?

When we look at the analysts’ forecasts, the most negative comes from HSBC, whose analysts believe sterling could keep on falling to hit $1.10 with the speed of the fall dependant on how much fear is driven into the currency, and how fast the Federal Reserve raises interest rates in the US. From a Euro perspective, we believe the same target level to sterling of €1.10 to £1 could also be hit quite quickly, especially as we look to roll back QE in Europe and Inflation continues to come through.

Overall when it comes to the debate about the negotiations for leaving the EU, we feel that this is a probable scenario following Article 50 being triggered on March 29th 2017: –

  1. Negotiations will not start properly until June 2017 once we get past French elections;
  2. Both parties will be negative and state and restate stoic positions throughout the summer and into Autumn, until we get past German elections in October;
  3. Towards the end of the year we will have more positive conversation driven by Angela Merkel;
  4. In early 2018 we will have movement towards agreeing transitional arrangements that give and take on both sides;
  5. By autumn 2018 we will have an agreement that is transitional which does though still see us leaving the customs union and single market that can be put to Parliament late 2018 or early 2019;
  6. Then we leave and have transitional arrangements or worst case parliament and house of lords do not approve and we will end up with an election in 2019 and potentially further legal actions taken against the government to prevent them leaving the EU without legislation being passed that will never get through the House of Lords! 

Silver Lining!

As I have said before, the UK is not an economy that has an impact on the rest of the world and the UK economy is doing better than many analysts predicted. As a result, the 20% of our actively managed portfolios that are invested in UK Equity are doing very well. In addition, Asia, US and Europe are all showing signs of growth increasing and global trade accelerating. These factors reflect a strong Macro position for the global economy (today) which when coupled with a potentially weakening currency are positive and are not issues that we would lose sleep over.

As most portfolios are positioned with circa 80% of the assets held in overseas assets (equities and non-equities) when sterling falls we will see a further significant boost to the returns which have been above trend in the short term (up to 1 year) due to the way the economic environment has changed since spring 2016. The table opposite reflects the percentage of portfolio, that has circa 65% Equity and 35% Non – Equity, over the last 12 months compared to its benchmark, UK Government debt index and the FTSE 100.

Beware though!

Beware though of two negative scenarios, because what goes up, always comes down: –

Sterling weakens and then strengthens into 2018. If you do not see the fall as a free win and lock in the gains upon receipt, what is given cheaply in 2017 may be taken away just as cheaply in 2018 as Sterling rises on optimism of a deal being struck. Key is, see this and lock in the gains and do not be greedy and look at ways to hedge the currency risk to keep your global equity exposure, whilst the macro conditions are positive, but take out the currency risk.

  1. The Global Economic cycle is now 9 years old and it always comes to an end, usually after interest rate rises, therefore with at least 3 maybe 4 rate rises expected in the US this year, the end is nigh. It is likely that we probably have at least 2 years to go before the interest rate rises slow down the US economy due to the impact of additional fiscal stimulus, but with every interest rate rise that happens in the US we get closer to the end.

In summary, there is so much going on in the investment and political world and history will have a great deal to say on it. It is imperative that your Investment Manager monitors the economic data and the currency moves and de-risks the portfolio to lock in the gains that are being given in the short-term, so that the roller coaster is not experienced in the medium term before the bull run ends and recession return.

Despite all that I am looking forward to managing this over the coming months, because I am obviously an adrenalin junkie who just loves a challenge!