Monthly Market Report - August 2016

27th July 2016

With commentary from David Stevenson

So much for the financial betting markets and Brexit. We've been told for ages that experienced financial speculators tend to make a better job of guessing political results. Brexit yet again proved them wrong although this time to be fair the opinion polls were a tad more accurate than on previous occasions. Personally I'm still amazed that there were enough fools and simpletons out there globally who believed on polling night that sterling would rebound - and pushed the cable rate (how many dollars to the pound) up to $1.50 before it came crashing down within a few hours. It was always obvious that it would be a close run affair and in truth the win by Leave was indeed a close run thing. A majority of under 4% is hardly a landslide. But it is a decisive result nevertheless and the financial markets have been left to figure out what to do next. The most predictable financial turmoil has been in the FX markets, with much excited talk of the cable rate pushing first past $1.30, then $1.20 and maybe even ending up at parity. Given that over the last 15 years the cable rate has barely pushed much out of a range between $1.40 and $2, I personally can't quite see why sterling would collapse to parity. I even think any rate below $1.30 is probably a little excessive over the medium term.

Equity markets seem to have taken a much calmer view with the benchmark FTSE 100 Index pushing ahead to recent highs although - as we discuss in this report - there have been some much more worrying trends lurking beneath the surface. The sudden run on commercial property funds was also, in retrospect perhaps, entirely predictable. If the core concern is foreign capital leaving the country, why not start first with prime London commercial property? But here again there's some evidence that the panic was over played. Prices might slip a bit in key markets but we don't seem to be anywhere near a 2008 style meltdown. Some even expected severe selling pressure on gilts, but yet again events surprised - investor's in fact swarmed into gilts pushing yields to all-time lows.

So as Supertramp once famously declared, crisis, what crisis? Nevertheless, I'd be cautious about reading too much into the last few weeks. We need to see the sustained impact of Brexit over a period of months, if not years. That means focusing on inflation rates, dividend pay-outs, and earnings growth. It's still far too early to predict anything meaningful on these metrics but I'd suggest that caution might be the watchword for the rest of 2016.

Download the full Monthly Market Report here.


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