The UK spent the second half of 2016 trying to absorb the shocks associated with the decision to leave the European Union. Yet the outlook for the economy remains distinctly uncertain.
Having dodged the initial Armageddon scenario, signs suggest the UK economy has been relatively resilient post-Brexit as economic data continues to drip through. Consumption has remained strong and manufacturing firms have seen a boost in exports as a weaker sterling gives the economy a hoist. Meanwhile, equity markets – having been initially driven by a handful of international focused FTSE 100 stocks – have started to broaden with numerous sectors gaining momentum.
However, it is important to remember the UK equity market is not representative of the UK economy. Despite concerns waning over a potential recession; foreign/multinational firms moving away from the UK and currency translation effects; all three continue to hang over the UK economy.
The Rubik’s cube-like nature of the UK economy is highlighted by the increasingly rapid pace in events which are likely to impact on its outlook. The last quarter of 2016 sees a new president elected in the US, a potential rate rise by the Federal Reserve and a constitutional referendum in Italy.
The UK’s “phoney war” with Europe is set to end in March 2017 when the country formally triggers Article 50; a move which will start discussions on the UK’s withdrawal from the EU and the types of trade deals it can negotiate post-Brexit. The true pain, if any, of leaving the EU is likely to be deferred until the results of these discussions are made clear.
In October 2016, The International Monetary Fund cut its UK growth forecasts again on the back of the Brexit vote. In July, soon after the 23 June referendum, the IMF cut its 2016 GDP growth forecast from 1.9% to 1.7% and the 2017 forecast from 2.2%to 1.3%. In October it trimmed the 2017 forecast further to 1.1% although it has revised up this year’s growth forecast to 1.8% on the back of stronger than expected growth in the second quarter.
The IMF says it has also revised down its medium-term GDP growth potential forecasts for the UK from 2.1%to 1.9% due to the expectation that lower migration, trade and capital flows would take a toll.
With talks about the exit from the EU likely to be protracted, UK advisers are now operating in an environment where markets are likely to be more challenging and unpredictable. This may provide them with more stock-picking opportunities as macro concerns overwhelm short-term valuation considerations. However, with the ‘growth at any price’ story reaching record levels and a continued desire for income, can advisers balance the risk/reward challenge?
CoreData Research collected the views of 612 financial advisers in October 2016 to get their outlook on the investment landscape in 2017; the short and long-term impact of Brexit and how this will impact their investment portfolios.