Emma Wall: Hello, and welcome to the Morningstar series, "Market Reaction." I'm Emma Wall and I'm joined today by Tom Beckett, Chief Investment Officer for Psigma.
Hi, Tom.
Thomas Becket: Hi, Emma.
Wall: So, life post Brexit doesn't seem to be what project fear had threatened us with. The FTSE has rallied considerably and economic growth looks like it maybe on track for a 1% GDP next year. So, have we dodged the Brexit bullet?
Becket: I think it's important you separate the conversation now into two separate parts because there are very different forces at work. I mean, I think let's think about the market reaction first because markets move much more quickly than an economy. Certainly, well, that's been my experience over the last dozen years.
I mean, in terms of the first big shift we saw that was obviously in the currency and I think on a trade-weighted basis the sterling has fallen by about 12% since June 24th when the decision to leave the EU came by after referendum. So, obviously, that's had a positive translative effect upon U.K. corporate earnings given most of the companies' earnings in the U.K. derived overseas.
So, we've seen a shift higher in the FTSE 100 in particular, but actually more recently there has been a catchup trade from lots of domestic companies as well. So, I think, first of all, to talk about the international side of things, clearly there has been an improvement in earnings there which has been translated into better stock performance.
On the domestic side, I think it's probably second guessing to a certain extent your question about the economy, are things next year going to be "less bad" than people were first forecasting after the Brexit news came through? I think it's far too early to tell I think in all honesty. I think some of the data we've seen so far has been somewhat ambiguous. So, certainly, on side we've seen a situation whereby business confidence has fallen.
On the flipside of things, things like retail sales hold out quite well. Now, whatever that's because the sun is shining outside remains to be seen. I think with regards to the economic understanding and the answers to the questions you've got, let's wait until we get into start of 2017. My view is still for really quite low growth in the U.K. as we head into 2017 and the possibility perhaps of a technical recession.
Wall: And that too early to tell accusation is one that was levied at the Bank of England with its QE program, the fact that we are committed to buying GBP70 billion worth of bonds and indeed lowering interest rates even further perhaps down to 0.1% next month. Do you think they acted too soon and indeed, as you say, the truth is yet to out?
Becket: I mean, I think actually it's just positive to see Mark Carney finally do something and earn the millions of pounds that we're paying him to look after the Bank of England. I mean, let's just take the three things that they announced in isolation and then put them back together to what it means for the U.K. economy.
First of all, with regards to interest rates, I think they are pushing on a piece of string to quote Mr. Keynes'. I can't see that that's going to have any positive effect whatsoever and actually for choice, I would say that lowering interest rates has negative effects upon the economy because I think we've gone past the point of equilibrium where it starts being where it continues to be a positive.
Secondly, with regards to the quantitative easing program, I mean, okay, but I've seen no evidence from the last decade or over the last nine years that we've been trying such policies has really worked that well anyway. So, I'm skeptical of that and I think actually it's just made expensive investments yet more expensive and bought forward future returns into the now for stretched investors.
I think finally with regards to what's been titled the Funding for Lending Scheme 2, okay, fine, let's try and encourage the banks to lend but I think the penalties for not lending are less penal in the first announcement of funding for lending from a few years ago. And I think the second point to take into account is banks sort of wash with liquidity.
Liquidity is not the problem. Banks have got money to lend. They can't lend it to the people. They want to lend it too because they don't want to borrow. So, I don't think that's necessarily going to help. So, I think I'm afraid to say that monetary policies' ability to shelve off the worst or put off the worst forms of economic regression I think are somewhat limited and I don't think that's going to be a huge factor as we head into next year.
Wall: So, heading into next year then with that uncertainty still around as we do not know the true impact of Brexit and perhaps central bank policy is not effective, what does this actually mean for investors?
Becket: I think it makes it a very difficult environment to invest because if you think back to previous episodes when you had expensive equity markets, at least you could go into fixed interest investments and still achieve return. Now that's impossible. And I've just come from our latest investment committee meeting and I was questioned on my views the equity markets around the world strike me as being expensive for low rates of earnings growth. But as people quite rightly questioned, whereabouts that you're going to put the money? You can only have a certain amount in emerging market equities or emerging market debt which look attractive or elements of high-yield corporate credit look attractive.
Really, equities are going to remain a high weighting in people's portfolios because of the positive options elsewhere. So, I can sit here and tell everyone that equity markets are expensive until I am blue in the face. But as we've seen from the last couple of months, in particular an acceleration post Brexit because of the fall we've seen in government bond yields, I think equity markets can continue to defy gravity.
I think that the whole concept of equities investment almost has to be turned on its head because I think people are now looking at equities less as equities and for their growth but actually like corporate bonds because of the income you can get. So, effectively, corporate bonds have now – equities have now become almost corporate bonds but certainly a spread product. How much extra yield can I achieve over cash deposits and indeed government securities?
Wall: Tom, thank you very much.
Becket: My pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
