Following the UK’s vote to leave the EU, exchange rates for the pound have fallen and the outlook for growth in the short to medium term has weakened strikingly.
Amidst mounting signs that quitting the EU may have an adverse impact on the UK economy, on August 4 the Bank of England (BOE) unveiled its financial stimulus to support growth. This package includes cutting interest rates for the first time in seven years to a new historic low of 0.25% (according to Trading Economics).
Additional stimulus package measures include:
The BOE Governor defended the bank’s decision to cut the interest rates and implement other policy measures, by claiming that the UK’s economic outlook post-Brexit has deteriorated remarkably, and that the economy has shrunken at its fastest pace since the last time the Bank of England lowered rates. Indeed, many economic indicators have fallen significantly, in most cases to levels last seen during the financial crisis and in some cases to all-time lows.
In such a scenario these measures are proactive efforts to reduce uncertainty, reinforce confidence, stem the probability of recession and support the necessary adjustments in the UK economy. The BOE also indicated that, if necessary, all elements of the stimulus package can be further intensified, including another rate cut close to zero.
Bottom Line for Investors
With the central bank cutting its 2017 growth forecast to 0.8% (compared to the previous forecast of 2.3%), mounting uncertainties about future growth among businesses and predictions for rising unemployment next year, most economists believe that current policy isn’t sufficient enough to foster any sustainable economic growth in the coming quarters.
Lower interest rates may also have the adverse effect of hitting pension funds substantially, meaning annuities could provide an even lower income when people retire. On the other hand, further weakness in the pound may boost exports and provide relief to multinationals—to the extent that they do business outside of the EU. Time will tell how resilient the UK’s economy can be under the pressure of change, and investors can only hope that the outcome is slightly better than expected. With expectations so dour at this stage, it gives more room to that possibility.
So, what does this mean in terms of investment strategy? It’s common for investors to overestimate their ability to stay steady over the long-term, especially when markets turn volatile. Instead of putting your nerves on a nail-biting roller-coaster of ups and downs as we wait to see how the UK’s economy will withstand its current situation. Ask yourself, “do my asset allocations reflect my personal risk and reward equation?” At Zacks Investment Management, our focus is on risk-adjusted returns to optimize for this equation as defined by you. Know too that Morningstar currently ranks five of our investment strategies in the top 10% of their respective classes (as of 6/30/16)—we call this our “Dean’s List.” Learn more about these strategies and how they might steady your nerves by clicking below…
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