Voting to leave the European Union has not turned out to be the financial armageddon Project Fear threatened – yet. The International Monetary Fund has revised its growth forecast, but only downgraded GDP expectations for this year and next by 0.1%. The FTSE 100 after an initial steep fall has regained all its losses, and gone on to grow. The S&P 500 hit another all-time high last week and other global markets look stable. So what was all the fuss about?
It is important at this point to note it is still early days. Market volatility has increased significantly in the past two years – a product of this part of the cycle. After the great gains post the global recession, major indices have plateaued, with muted returns from developed markets in particular. While the S&P 500 and the FTSE 100 have rallied since the EU referendum result was announced on June 24, this does not necessarily mean this trajectory will continue. Nor are the IMF forecasts set in stone – history tells us GDP growth is only ever certain after the fact, and even post-year end they are often revised.
But let us assume that these gains stick, and the IMF growth forecast is accurate – does this mean that pension savers have dodged the Brexit bullet? Unfortunately not. There are other risks associated with the Brexit fall-out which could impact your retirement income. We list them below – remember forewarned is forearmed.
Property Prices
Within a fortnight of the vote result being announced six commercial property funds had closed their doors to redemptions – taking £18 billion of assets off the trading table. A few have subsequently reopened but all have been forced to revalue their assets. The property funds closed their doors because of the wave of investors who rushed to sell their commercial property exposure in the wake of the vote result, and illiquid assets cannot be daily traded en mass.
Why were they looking to sell? The argument goes that now Britain is leave the European Union it is no longer as attractive a place to do business. If businesses leave, then demand for commercial property falls, and so do those buildings’ values.
But even if you have no exposure to commercial property you could still be affected – as there is speculation the fall in property values could be mirrored in the residential housing market.
“The reality is that it is still very early days to assess the true impact of the Brexit vote on the housing market. Our view remains that sales volumes are likely to slow and price growth will moderate over the second half of the year,” said Richard Donnell, Insight Director at Hometrack.
“The severity of a slowdown will depend upon the response of consumers and businesses to the uncertainty created by the decision to leave the EU and the impact this has on the economy. The early market activity data confirms our view that London will bear the brunt of any slowdown.”
With more than five million Britons relying on their property to fund their pension, this could prove disastrous.
Interest Rates
Retirees may no longer be forced to buy an annuity when they retire, but the majority of people investing in their 60s, 70s, 80s and beyond will adopt a low risk strategy. Lower risk usually means a larger allocation to bonds than equities in order to prioritise capital preservation and a regular income – but with the Bank of England threatening to lower interest rates even further this is bad news for those approaching retirement and those already drawing a pension income.
Financial Future of the City
The last threat is the least certain, and that regards the future of the financial industry in the UK. With so many pension providers based in the City, will those big banks choose to remain in what was the financial heart of Europe if the UK is no longer part of the European Union? The future of the City will become clearer in the coming months as the new Prime Minister Theresa May and the new Chancellor Philip Hammond set out the state of play between Britain and the EU post-Brexit.
