The biggest cuts of significance were for the US, from 2.7% to 1.9%, and Japan, from 1.3% to 0.5%. China was unchanged at 6.7%. However, markets have been surprisingly resilient with large capitalised stocks in the US and the UK outperforming.
The Brexit vote, which we believe shows public dissatisfaction with the political process, has increased short-term uncertainty over the UK economy. In our view, the future path of the economy will depend very much on the negotiation of new trade deals. The UK will take two years to exit the EU after it formally gives notice but the agreement of trade deals will take longer. There are some reasons to be optimistic. The UK could retain access to free movement of capital, labour, goods and services across the EU as both sides are likely to seek a mutually beneficial deal. There is also scope for the UK to develop opportunities to trade with emerging markets on individual terms without reliance on Europe.
In the immediate aftermath of the vote, we have seen commercial property markets come under intense selling pressure. The financial sector has performed poorly due to the outlook for lower interest rates and rising signs of stress in European banks, notably in Italy and Germany. On the positive side, larger, international stocks have outperformed. Consumer staples and tobacco were amongst the best performing sectors after the referendum. As sterling has weakened, overseas revenues have become more valuable to UK investors. The UK top 100 companies rose to the highest level since August 2015, although the more domestic focused UK top 250 shares fell to the lowest since 2014.
Despite relative resilience in equity markets, there have been some indications of rising risk aversion. For example, gold rose to the highest level since 2013, up 26% so far this year in US dollar terms. Bond yields have been falling relentlessly indicating lower expected growth and interest rates further out. Rates in Switzerland are now negative across the entire yield curve meaning that investors holding this debt for the duration are guaranteed to lose money. Across the globe, there is around $12 trillion of negative yielding government debt, over half of which is in Japan.
In the short term, liquidity in the banking sector is perhaps the greatest risk to global growth prospects. High yield bonds could be susceptible to weakness. If consumer and business confidence were to decline, this would increase the likelihood of a recession as highlighted by the Bank of England. Further out, there is potential for a domino effect with a number of European countries already seeing calls for votes on EU membership. Ultimately this could result in reform which may prove very positive if it promotes increased competitiveness from countries across Europe.
Despite challenges, diversified portfolios have performed well due to international exposure. We have been a strong proponent of gold and total return funds in the current market. These asset classes have helped to reduce volatility from equities and improve overall returns. With little prospect of interest rate rises in the short term, we remain positive on these areas. Investors should be conscious not to overpay and focus on sustainable income.
Investors should continue to hold a diversified portfolio which will help reduce volatility but provide for long term growth.
Speak to us directly to find out more about our view on Brexit and the possible effects on your investment portfolio. Call us on 0800 877 8866.