Some 58 per cent of advisers believe that the UK market will nosedive before the year end following the FTSE 100’s strong post-referendum performance, according to research from MetLife.
The study, which was conducted among a sample of 102 retirement and investment specialist advisers, also found that 44 per cent are recommending clients who are retiring within five years to lock in gains now.
Since the shock Brexit result was announced at the end of June, the FTSE 100 has returned 13.5 per cent compared to its pre-Brexit return since the start of the year of 3.86 per cent.
Performance of index after Brexit
Source: FE Analytics
While is seems nobody is entirely sure why this has been the case, some have argued that the increase in certainty has bolstered investor sentiment while others say it is simply down to the weaker sterling boosting the market.
Regardless of the cause, MetLife’s data suggests that many investors believe the FTSE 100’s strong performance isn’t sustainable – the report also found that 31 per cent of advisers plan to contact their clients about protecting pension savings and pocketing gains now.
Simon Massey, Wealth Management Director at MetLife UK said: “Clearly there is real nervousness out there with advisers concerned about potential downturns and braced for market volatility ahead with most expecting a significant correction this year as the picture becomes clearer.”
“Clients still want and need to invest but many are re-adjusting their attitude to risk. They are focused on guaranteeing and capturing gains while they can, while accepting that uncertainty is here to stay for the foreseeable future.”
Should the FTSE 100’s rally be making investors nervous or should it be filling them with confidence that the rest of this year will offer more of the same?
Ben Gutteridge, head of fund research at Brewin Dolphin, says the firm’s outlook for the UK stock market into year-end is still constructive despite economic and political uncertainties.
“The major catalysts for the FTSE performance have been accommodative central bank policy, the weaker pound translating into an improved earnings profile for our internationally facing companies, and a global economy that remains buoyant despite the potentially destabilising political results,” he said.
“At a sector level too, we are now moving into year-on-year earnings calculations that remove the significant negative impact of a falling oil price - something that has hit the UK ‘energy heavy’ index fairly hard.”
“Given these factors are unlikely to reverse into year-end we are left feeling fairly comfortable with our UK stock market exposure.”
That said, Gutteridge points out that there are still headwinds on the horizon that could trigger reasonable market sell-offs such as the US election, China’s growth slowdown and Japanese deflation, although he says that unforeseen events tend to have a bigger impact.
“Regardless of the clear and present danger for market weakness into year end, over a more meaningful time horizon central bank accommodation, stabilising global growth and a modestly positive earnings outlook leave us with a marginal preference for taking more equity market risk than our benchmarks,” he added.
Neil Jones, investment manager at Hargreave Hale, always felt that markets could do well in the case of a Brexit. However, he was surprised at how quickly the market rallied after the results were announced as he thought a fear of the unknown would put pressure on markets for longer.
Performance of index in 2016
Source: FE Analytics
“I do feel reasonably optimistic and with sterling remaining weak against the other major currencies, exporters should continue to benefit. Over the next couple of years I could see the market pushing higher from here,” he said.
“Saying that, I would not be surprised to see some sort of set-back before the year is out, perhaps even when people return from their summer holidays next month and start to reassess things. So we are not getting carried away yet and instead using the market strength to continue tidying up portfolios and sell some holdings which have been lagging, but have been dragged higher by general market conditions.”
“This has also resulted in us raising cash levels a little further, something which gives us a buffer if sentiment turns.”
“So overall, I don’t feel there is a major need to reassess current risk appetite, but instead use the market strength as an opportunity to improve portfolios and clear out investments which have perhaps been held for too long.”
Adrian Lowcock, investment director at Architas, points out that it is always a good idea to position more defensively during a rising market.
In terms of the current environment, he says that the outlook for the UK economy is mixed given the impact of Brexit remains unclear yet weak sterling and central bank stimulus is having a positive impact on markets.
“The weaker pound will boost profits for some businesses whilst the extra QE means that the price of bonds has shot up and therefore relative to bonds equities look attractively valued. At the moment bad news doesn’t seem to be getting a look in to markets and given we are towards the top end of a trading range I am cautious at these levels,” he said.
“[Brexit] has clearly knocked confidence in the UK and that affects business investment and consumption. The weak pound will take time to benefit the UK economy - in the meantime we will see a pickup in import costs and holiday costs which will hit consumers’ pockets and therefore their confidence. Add to that a strong rally since the Brexit vote - I am warier as markets rally.”
“It is better to spread the risk and take some profit before the market does it for you. It is always after the event that investors look for protection and that is the time when you should be looking for investment opportunities. It is a good idea to hold defensive funds such as absolute return funds or even keep some cash aside ready to invest. Corrections come out of the blue but they happen often enough that they are predictable to some extent.”
Patrick Connolly, head of communications at Chase de Vere, agrees that is makes sense to rebalance investment portfolios after strong gains have been made. That said, he points out that trying to predict future market movements is of course almost impossible.
“There is always a greater possibility of a market correction after they have risen strongly, although it is also possible that markets will rise further from here. The truth is that nobody knows,” he said.
“This is why the best approach for most investors is to adopt a long-term strategy, ignore background noise and sentiment and to hold a balanced investment portfolio in order to diversify risk.”
