Investment clock: Brexit boosts multi-asset returns
by Trevor Greetham
Mon 19 Sep 2016
Multi-asset performance has been very strong since the UK referendum, rewarding sterling-based investors with exceptional returns for the year to date. Bonds surged globally on the back of easier monetary policy expectations at home and in the US, while stocks benefitted from an increase in the value of overseas earnings in sterling terms. Domestically focused asset classes like commercial property have fared less well, with markdowns in capital values likely to outweigh rental income this year.
Brexit uncertainty will be a drag on UK growth over 2017. However, the prospect of increased monetary and fiscal stimulus is positive for the longer-term outlook for the UK economy, and at these yields the price of gilts looks expensive. Quantitative easing has distorted the market so much that it is pricing in base rates of 1% or less over the next 30 years. Policy will remain loose for some time to come. But to see value in gilts you need to believe the UK is heading into permanent deflation or perpetual economic contraction, which is unlikely.
The Royal London Asset Management Investment Clock is a model-based framework linking asset returns to different phases of the global business cycle (see chart above). The clock is currently in the commodity-friendly ‘overheat’ phase, characterised by positive global growth and rising inflation (see main chart).
Commodities have done well, for the first year in six, helped by better data out of China, but inflation risks remain subdued. Positive US and global growth with loose policy provide a positive backdrop for stocks, especially in emerging markets and Japan. Volatility tends to increase in the autumn, and dips could provide a good opportunity to buy in anticipation of stronger returns into the New Year.
Trevor Greetham is head of multi asset, Royal London Asset Management