The UK’s recent decision to vote out at the EU referendum was always likely to have an impact on financial markets. We initially saw a sell-off in equity markets, UK government bond yields falling to new lows and a quick decline in the value of sterling. This was quickly followed by a recovery in the FTSE 100 in particular, even if the more domestically focused FTSE 250 has struggled to gain as much traction, whilst the pound continues to struggle.
As keen exponents of diversification between assets classes, geographies and investment strategies the net effect on our portfolios has been negligible and, indeed, in some cases quite positive – perhaps surprisingly so. We took the decision last year to reduce exposure to the UK in favour of overseas markets and the subsequent currency differential has had a positive impact on the majority of overseas holdings.
One area of the market which has received much negative press in the past week or two however, has been the UK commercial property sector. A weakening pound potentially reduces the attractiveness of UK property to existing foreign investors who may look to cash in quickly at the thought of empty properties in London and, with an increasingly negative sentiment, many large institutions in particular have sought to pull money out of the sector in spite of many fund houses having already taken price reduction measures to try and discourage investors from doing just that.
The result of this negative sentiment and higher than expected withdrawal requests is that fund managers need to manage their cashflow and liquidity more carefully. Properties take a long time to sell, and if the amount of cash expected to flow out of the fund exceeds or comes close to exceeding the forecasted cash within the fund, then managers will exercise their right to suspend trading in order to protect investors remaining in the fund.
As already alluded to above, we generally look to diversify between assets. Not only does this apply at a “headline” level (i.e. spreading monies between, property, bonds, equities, etc), but it also applies at a “sub-class” level (i.e. spreading monies within the property asset class between the UK, overseas, shares and infrastructure).
Therefore, whilst the downturn in UK commercial property sector will undoubtedly have an impact on valuations of our clients’ property portfolios, in many cases we feel that the diversification at “sub-class” level will make our property portfolios fairly resilient on the whole, and the diversification at a “headline” level will add to this resilience.
That said, our Investment Committee has taken the decision to increase weightings to infrastructure and overseas commercial property as an interim measure, although for those who are “locked in” to the UK commercial sector, implementing this change is likely to prove difficult.
How low the pound can sink is open to debate. Depending on which newspaper you pick up or which fund manager you believe, we either have further to sink or have reached the bottom. Whichever of these scenarios proves to be correct, there will be aspects of the portfolios we have built which could perform and aspects which could struggle on the back of a weaker domestic currency; the wider effect could be broadly neutral in our opinion, and over the long term we retain belief that our approach will protect our clients from intolerable shocks.
Clearly a recovery in the pound would be good news insofar as UK commercial property is concerned and, to a lesser extent, residential property. On the flip side, falling interest rates could spell further good news for physical infrastructure and a weakening pound could spell good news for overseas commercial property and global property shares.
The Side Effects
One thing to be mindful of is the potential for “contagion”. For example, investors no longer being able to make withdrawals from their previously relatively secure property holdings could see some other areas of the market come under increased pressure which, in turn, could lead to a “mini-run” on other areas of the market. We have not seen signs of this yet but it is still very early days.
There will no doubt be further shocks as a result of “Brexit” and only time will tell as to what the final impact will be. US elections later this year as well as important European elections next year could lead to further geopolitical uncertainty which, in our view, makes bolstering holdings in gold a sensible course of action to take.
This is something we will look to increase into our clients’ portfolios at reviews, but if you would like us to take action here for you now please contact Richard Haines, our Investment Director to discuss (01633 653171 or email@example.com).
The value of your investments can go down as well as up, so you could get back less than you invested.