The momentum has continued to surprise on the upside;

The momentum has continued to surprise on the upside; not just here in the UK but in almost all global markets. We can probably put this down to four major factors which are:

  • Monetary easing (lowering interest rates and further quantitative easing) is expected to continue in Europe and Japan in particular and possibly here in the UK too.
  • The prospects of cheap money and low interest rates continue to provide little option for savers who seek income and/or growth.
  • The economic news from China has exceeded expectations and signs of rising consumer demand (in particular the motor industry) have reflected well on the commodity prices, including oil.
  • OPEC has recently agreed to limit production, which should provide further impetus to the continued rise in oil prices. This is welcome news for countries whose economies depend on oil revenues.
  • Commodity markets have regained some momentum after a number of years in the doldrums.

So far things look good but going forward we believe that the main factors to consider in the short term will be inflation and the requirement for governments to stimulate their economies in order to maintain economic growth.


There is no doubt that we have been in a low inflation environment for some time. Usually, low inflation means lower returns but from an investment perspective the latter has been far from true and stock markets have generally performed admirably.

The same cannot be said of cash and bonds:

  • Bank of England Base Rate is at 0.25%
  • The 10 year gilt yield is 0.96%

It is unlikely that interest rates will rise significantly for some time and so we do need to prepare ourselves for continued low levels of income from all sources of investment by ensuring that our investments are managed as efficiently and effectively, within our own levels of acceptable risk.

2016 started with concerns over China and the possibility of interest rate hikes in the UK and US. Fears over the Chinese economy appear for be receding as evidence seems to suggest that consumer demand there is improving. The economy continues to evolve from one so reliant upon manufacturing and export to one where there is a balance between services and manufacturing.

As investors, you will have seen the value in your portfolios rise considerably since June 2016 not least because the value of sterling has fallen. The benefits of a weak currency are:

  • Cheaper exports, which make companies more competitive and improve the likelihood of securing business.
  • Payments to individuals and companies from overseas earnings are boosted.
  • UK investors see the value of their overseas assets increase in value.

The irony of this is that the governments of most major economies have been attempting to weaken their currencies to help boost trade, but the UK voters achieved this in one day.

Inflation will rise because imports will be more expensive. In recent times central banks have struggled to generate inflation and the target of 2% was beginning to appear a difficult aspiration to achieve. We now have inflation because imports (food, oil, commodities etc.) will be more expensive for us to buy. As shown in the adjacent graph, the cost of oil has now risen to over $52 per barrel.

However, the type of inflation generated by a weaker currency is considered to be a ‘bad’ type of inflation because the cost of goods rise and takes away spending power and has a similar effect to tax. ‘Good’ inflation is achieved by wage growth and increased productivity because this puts money into the system which then circulates to generate wealth. The outlook for inflation over the next 10 years has increased to 3.03%, which is measured by dividing the yield on a 10 year gilt by the yield on an index-linked bond.


In recent days the spotlight has fallen squarely on the UK, which has previously been considered a safe haven for currency, and the impact that Brexit will have on the economy. Following the result of the EU Referendum, the value of Sterling has slumped to a 31 year low against the US Dollar and some even speculate over the possibility of Sterling-Euro parity.

Sterling has further weakened on fresh concerns over some of the rhetoric emanating from the recent Conservative party conference, especially after Theresa May stated that Article 50 would be initiated in March 2017. Her comments concerning free access to the single market and her apparent tough stance on immigration imply we could be heading for a “Hard Brexit” and this has confused investors. Additionally, concerns over how the UK will cope with the huge current account deficit (around 6% of annual GDP) and you have most of the reasons why Sterling has weakened so dramatically.

In a recent interview with Bloomberg TV, Stephen King, HSBC’s Senior Economic Adviser to HSBC, stated that many foreign investors have only invested in Britain because the UK is a member of the EU single market and Brexit risked losing that funding. He said: “If people have been investing in Britain to be part of the single market and Britain is no longer part of the single market, there is every chance that foreign companies – Japan, the U.S. and elsewhere – would choose to no longer to invest in Britain, That means you have a black hole in your current-account deficit.”

Contrary to this assessment, Mark Carney stated last month that Bank of England policymakers expected the UK’s current account deficit to halve in the next 3 years.

If nothing else, these differing assessments and predictions serve to demonstrate that we are in unchartered waters and uncertainty will continue to prevail until we have a clearer picture of what our proposed extraction from the EU will look like.