The opposite of what you expect

25th April 2017

Hands up if you expected:

  • Britain to vote to leave the EU and
  • Donald Trump to be elected as president of the United States?

Well done if you did, you would certainly be in the minority with what could be described as the ultimate contrarian prediction.

In that case, who would have predicted stock market returns would have been so strong following two political shocks of this magnitude. Markets hate uncertainty right?

Perhaps in this case there are other influences at play. It’s better to travel than arrive, as market commentators are fond of saying. Both these big events have a long way to go before they play out fully.

The initial impact after the Brexit vote saw a big devaluation (17%) in the pound against the US dollar. This means that clients who invested in overseas equities and commodities, prior to the vote to leave the EU, saw their portfolios rise in value. The drop in the pound has also boosted UK equity returns where such a significant proportion of earnings comes from overseas. Gilts also rose strongly on the back of a further rate cut from the Bank of England.

Whilst he may like to, Donald Trump should not claim full credit for the recent surge in US stocks as signs of a pickup in the pace of growth in the US and world economy pre-dated the November election. Having said that, stock prices are likely to have been positively impacted by expectations of large scale fiscal stimulus and cut back to regulation under the Trump administration. It will be interesting to see the market reaction as words change to actions.

Other top performing areas have been emerging markets and commodities with returns of over 30% over 2016. The worst performing have been UK commercial property, which suffered liquidity issues in the wake of the Brexit vote, and cash savings. Interest rates have been so low for so long that savers are losing money in real terms. Over the seven years since January 2009, cash has returned a cumulative 4.8%* whilst costs of living have increased by around 20%**.

What does all of this tell us? Attempting to predict the best place to invest your money at any time is like a high stakes game of ‘pin the tail on the donkey’. Predicting the future is hard enough, but predicting the outcome of events is even harder. It also tells us that getting it wrong can be extremely damaging, either in terms of losses by being invested in the wrong area, or the lost opportunity of not being invested in the right area.

The strategy we utilise with our clients involves investing in a diverse spread of assets which is adjusted to match the clients’ attitude to risk. This avoids the risk of overexposure to one type of asset as a blend allows some areas to perform well when others are not. This approach has served our clients well with a typical medium risk multi asset portfolio returning in excess of 80% since January 2009. Most importantly, it does not rely on predicted events coming to pass because as the last year has shown, the chances of getting this correct are very small and often the opposite of what you would expect will occur.

*Based on BOE base rate accumulated over the period

**Based on RPI over the period