The most anticipated financial news of last week was the US Fed’s (the US central bank) announcement on interest rates. Although there had been earlier indications of a further rate rise in July, it was not entirely surprising based on the latest economic data releases in the US and around the world that the Fed felt differently. Nevertheless, it was disappointing to hear how unequivocally the Fed expressed that there was no requirement for a rate rise at the moment.
This was far more ‘dovish’ than the ‘hawkish’ statement expected earlier and could lead one to believe that major central banks are keen to err on the side of being overly supportive of markets ahead of the UK’s EU referendum, thereby providing a ‘monetary airbag’ in case a Brexit vote should cause “market turmoil”.
In the UK, Bank of England followed suit and left rates unchanged at 0.5%. This had been widely expected. Governor Carney continues to reiterate that the biggest risk to the UK’s near term economic growth prospects is indeed a Leave majority at the referendum. This led to a number of well respected former Chancellors to comment that he should retain his independence and not make such comments!
Where does this leave us in the upcoming EU Referendum week? Our approach to dealing with such uncertain events is to ‘keep calm and carry on”. Following one’s fears and emotions by cashing in investments has in past situations not resulted in better outcomes for investors.
If the feared event doesn’t happen and markets rebound swiftly, investors tend to be reluctant to get back in at higher prices and miss substantial upside while they deliberate. On the other hand, if the market upsetting event does occur and the cashing-in decision has seemingly saved the day, then investors try to time their re-entry into the markets. Research has shown that market-timing rarely works on a consistent basis. Investors tend to wait too long; they re-enter when the markets have recovered beyond where they stood before the event. This at least was the widespread experience with many private investors over the course of the 2008/2009 Great Financial Crisis.
The pre-referendum situation is developing exactly as anticipated. Similar to the run up of the Scottish referendum in October 2014, the polls are beginning to look as if an exit is likely; To this end, public discourse on the potential economic and monetary impact of an exit is also increasing. This leads capital markets beyond the UK to suddenly take note and trade lower, – thereby exacerbating a general ‘risk-off’ trend which began a week earlier.
It is likely markets will become more volatile and it will get increasingly uncomfortable in the run up to the referendum and the key will be to hold one’s nerve. The best portfolio strategy is to remain invested in line with your risk profiles, which means neither betting on a Remain, nor a Leave outcome, but rather sensitively navigating through whatever may lie ahead knowing that you have sufficient emergency cash reserves to ride out any market upheavals.
You should also remember that your portfolios are invested in a globally diversified manner and as such the effect of such a market downturn will be less upon your portfolio as compared to someone with greater exposure to the FTSE and UK bond markets within their portfolios.