Q3 2016 Quarterly Outlook
It seems like the investor thirst for yield is unending. The magnitude and persistence of this preference over the past several years has been remarkable. It also pervades asset classes globally, affecting fund flows, currency, valuation, and total return. As we see on the following pages, falling interest rates in the past few months have had significant impact.
Despite the variety of events marking the second quarter, it was the results of the UK referendum (“Brexit”) indicating the British voter preference to secede from the European Union that will impact investor mindset for some time. Shocking financial markets despite the relatively even split of pre-voting polls, the reaction in the marketplace was pronounced. Equity markets local to the vote and abroad suffered significant drawdown only to bounce higher a few days later going into the final week of the quarter. Currencies on the other hand felt the brunt as the British pound (GBP) fell over 15% from the pre-Brexit high and has settled in at one of the lowest levels in decades. The expectation for central banks to be “lower for longer” has now extended to where it may be described that investors expect “lower forever.” In the end, the result of the vote has created more questions than it has answers – especially as we approach further elections in the U.S. and abroad throughout the rest of the year. Markets do not like uncertainty, and while the decisions of an individual politician fade in the long-term context of investment horizons, they can cause risk and opportunity in the near term.
The work of developing a long-term investment plan accounts for the uncertainty that can occur in shorter time frames. Until there is better information to assess what is an opportunity versus a risk, it is best to stick to the plan.