• The National Institute of Economic and Social Research's forecast of world output growth this year is unchanged at 3.0 per cent – the slowest annual growth rate since the 2009 recession. World growth is expected to strengthen to 3.2 per cent next year and 3.6 per cent in 2018, but to remain slower than before the global financial crisis.
• Downside risks to the forecast include economic downturns in the advanced economies that central banks may lack ammunition to counter, as well as financial instability as a result of low and negative interest rates. These point to a need for more balanced policies to promote expansion, with fiscal policy playing a greater role.
• With trade growth in recent years already reduced to half its pre-crisis rate, action to resist protectionist pressure and to promote further progress with international economic integration is vital.

In the advanced economies, growth has generally remained mediocre. International repercussions of Brexit have thus far been limited to the effects of a further fall in sterling. In the United States, recent data have been mixed: the appreciation of the dollar since 2012 has remained one restraining factor and political uncertainty ahead of the elections may have been another. In the Euro Area, there has been no progress since the spring in reducing high unemployment. Even where unemployment is low – notably the United States, Japan and Germany, as well as the UK – limited wage pressures raise questions about the true tightness of labour markets. Inflation has remained below targets, by wide margins in the Euro Area and Japan. Inflation is closer to target in the US, and the Fed is widely expected to raise rates in December for a second time in the current upturn.

The performance of some key emerging market economies has improved: deep recessions in Brazil and Russia are easing, with inflation falling towards targets. The gradual slowing of China’s GDP growth seems on track, but a rise in credit expansion has added to financial risks.

One set of risks that has increasingly come to the fore concerns monetary policy in the advanced economies. The scope for easing monetary policy further is limited. It could pose increasing risks to financial stability, including by threatening the profitability of banks. In addition, central bank asset purchases are increasingly constrained by limited availability of suitable assets. A further, developing, preoccupation as the economic recovery matures is that low interest rates could leave inadequate ammunition for central banks to counter recession if it were to strike. These considerations point to the need for more balanced macroeconomic policies, including expansionary fiscal policy in many cases and structural reforms that boost demand as well as potential output.

Risks related to the threat to the internationally open global economy arising from the advocacy of protectionist, nationalist, and inward-looking policies, including by ‘populist’ politicians, have lately gained increased attention. This is occurring in the context of already slowing expansion of international trade and finance. Growth in the volume of world trade since the global financial crisis has been half the average rate of expansion during the previous three decades, and has barely matched the growth of global GDP. History carries many examples of economic prosperity being stymied by defensive, inward-looking policies, and action to resume progress with international economic integration is vital.

Iana Liadze, Research Fellow at NIESR, said “With our forecast of world output growth unchanged for this year at 3 per cent we are witnessing the slowest annual growth since the 2009 recession. Even if world growth strengthens to 3.6 per cent in 2018 as we expect, it will remain slower than before the financial crisis. Low interest rates and the limited availability of suitable assets for central banks to purchase suggest the scope for easing monetary policy further is limited. As long as this situation persists it will be up to other arms of macroeconomic policy to minimise the effect from any future recessionary shock.”

Source: National Institute of Economic and Social Research

Germany’s small businesses are the most optimistic about their own economy according to the inaugural Global Business Monitor report from international business funder, Bibby Financial Services (BFS).

Nearly three-quarters (73%) of German SMEs say their national economy is performing well in the global study that surveyed business owners in the US, Germany, UK, Poland, Hong Kong and Ireland.

More than two thirds (67%) of Irish SMEs are confident about the local economy. German and Irish SMEs are also most confident about the future with 57% of SMEs in both markets expecting sales to grow in the year ahead.

Conversely, less than one in five businesses in Hong Kong (15%) say they are confident about their local economy, with less than a quarter (24%) expecting sales to increase in the next 12 months.

Steve Box, International CEO of Bibby Financial Services said: “Germany is often seen as the industrial beating heart of Europe. Our research underlines the confidence of the small businesses in Europe’s largest economy as the EU looks to agree its shape post-Brexit.

“It is a different picture for the economy in Hong Kong where the majority of business owners are pessimistic about future sales and the local and global economies.”

The study reveals the sentiment of global SMEs in areas such as investment, confidence, challenges and opportunities, overseas trade and payment terms. In relation to international trade, findings show that small businesses in Hong Kong are three times as likely (69%) to export as those in the UK (22%) and seven times as likely as in the US (10%).

Steve added: “Due to its geographical location, Hong Kong is an important gateway to trading activities between China, the US and Europe. Its economy is highly export driven and this may explain why confidence is subdued during a time of economic change and significant currency fluctuation.”

Across the study, almost a quarter of businesses (24%) said that foreign exchange fluctuations are the biggest challenges they face in relation to international trade. For SMEs in Poland and Hong Kong, figures rose to 46% and 37% respectively.

Despite pockets of confidence in their local economies, the research reveals that nearly three-quarters (73%) of all SMEs have concerns about the global economy, with those in the US (83%) and Ireland (82%) the most concerned.

Steve concluded: “It’s clear that confidence in the global economy has suffered due to macro-economic and geo-political events in the last six months. The real question is for how long will confidence be affected?

“It is likely that the UK’s formal exit from the EU – commencing with the triggering of Article 50 by the end of March next year – will have further economic consequences that will be felt around the world.

“As the world shapes itself with a new US president and an EU without the UK, it is those small businesses that can adapt to changing domestic and international trading conditions that will be best placed to profit and grow in 2017.”

Other key findings of the Global Business Monitor report include:

Challenges

• Rising costs are a challenge for half of all SMEs surveyed (50%) – the most frequently cited.
• One in five businesses describe the availability of finance as poor.

Investment

• Despite concerns over the global economy, 95% of SMEs plan to invest in their business in the next 12 months, with staff training, promotional activity and technology the most popular areas.
• SMEs in Germany and the US are most likely to invest (98%).

Payment terms

• Irish SMEs wait longest for payment from customers (38 days) followed by those in Hong Kong (37 days).
• In contrast, US SMEs are paid two weeks quicker (24 days).
• Manufacturing (39 days) and construction (40 days) businesses typically wait longest for payment when compared to other industry sectors.

Source: Bibby Financial Services

by Ben Brettell, Senior Economist, Hargreaves Lansdown

The UK economy shook off Brexit-related uncertainty to post 0.5% growth in the third quarter. This is down from 0.7% in Q2, but far better than the 0.3% economists had feared.

The ONS said there was little evidence thus far of an output shock in the immediate aftermath of the vote.

Initial GDP estimates should always be taken with a pinch of salt, as they are based on less than half of the data which will ultimately be available, and are therefore subject to revision in the coming months. Nevertheless it’s difficult to interpret today’s figures as anything other than very good news for the UK economy.

Some will be concerned about the absence of any rebalancing of the economy away from the ever-dominant services sector, which grew 0.8% while everything else contracted. However, I don’t see this as a problem. In an increasingly global economy, individual countries need to specialise in industries where they have a comparative advantage. It’s clear to even the most casual onlooker that the UK has a comparative advantage in services, and therefore it shouldn’t come as a surprise that ever more resources are allocated to that sector of the economy.

The Bank of England may deserve some credit for acting swiftly to bolster the economy in the months after the referendum, though of course it’s impossible to predict what would have happened in the absence of any action. What today’s release does do is pour cold water on the chances of a further rate cut next month. In August the Bank said the majority of MPC members expected a further rate cut later this year, but at the time it was forecasting zero GDP growth. A stronger-than-expected Q3 performance is likely to mean the Bank leaves policy unchanged when it meets in November.

By Don Smith

Despite a run of better than expected UK economic data since the Brexit vote – including 0.7% second-quarter expansion, beating estimates – financial markets are increasingly concerned about the outlook for the country’s economy and its currency.

This can be seen most dramatically in sterling’s plunge on the foreign exchanges, which shows little sign of abating. On a trade-weighted basis, the pound declined 15% between the June 23 referendum and October 12, while it has moved from 0.76 to 0.90 versus the euro over the same period.

Some bounce back from this sharp slide appears likely, but there’s little doubt that sterling’s underlying trend remains firmly downwards.

Although the UK economy should steer clear of recession, the anticipated broader effects of Brexit may soon become more evident. As a result, growth is expected to slow next year.

Consequently, the Bank of England (BoE) may cut interest rates further to provide additional support. The next move would likely be a decrease to 0.1% (from 0.25%), but this might not occur until mid-2017.

With interest rates already so low, and an uncertain path ahead for the economy, the BoE will exercise caution when deploying the dwindling number of arrows in its quiver. It will therefore likely attempt to influence interest rate expectations ahead of any actual move, continuing to issue a very dovish message to the markets.

While inflation is expected to keep rising, the BoE will continue to regard this as a short-term phenomenon, which doesn’t challenge the longer-term low-inflation outlook.

At the same time, sterling’s steep fall was largely unexpected. The pound is being driven by psychological forces, technical moves and speculative reasoning, all of which can be especially volatile and therefore very hard to predict.

The significance of the UK’s decision to leave the EU, and very likely the EU single market, is immense. According to leaked Treasury documents, a so-called “hard Brexit” could cost the UK up to €73 billion annually, leading GDP to underperform by as much as 9.5% in the coming 15 years.

It’s worth noting that the economy is highly dependent on trade and that, in contrast to the euro, the pound operates without the protection of a solid current account position. With the potential to fall a further 5-10%, sterling is thus left hugely exposed as we move into a period of major change for the UK’s network of trading relationships.

As far as its impact on the domestic economy is concerned, this is something of a double-edged sword: good for exporters but bad for consumers, whose spending power will likely weaken due to the effect of a short-term burst of higher inflation as import prices increase.

While there may be a backdrop of solid economic data, sterling remains vulnerable due to the current account position of the UK, which runs a deficit of about 7% of GDP – by far the largest in the G20 and, historically, the largest on record.

This deficit reflects, in the simplest terms, the fact that importers have to sell sterling in order to acquire the foreign currency that pays for goods and services sourced overseas.

As a result, a huge amount of sterling flows into foreign currency markets due to the sheer volume of UK imports in relation to exports. This, in turn, makes sterling’s value in the foreign exchange markets heavily reliant on the purchase of UK financial assets by overseas investors, who have to then swallow the loss.

Without these purchases, the value of sterling would fall even further. BoE Governor Mark Carney aptly captured this sense of vulnerability in his pithy comment about sterling relying on the “kindness of strangers.”

Sterling consequently now appears more vulnerable than any other major currency to investor sentiment.

In search of reasons for the pound’s recent plunge, the early October announcement by Prime Minister Theresa May that Article 50 of the Lisbon Treaty would be signed by the end of the first quarter of 2017 surely helped focus investor sentiment on the actual exit event.

Brexit now looks likely to happen no later than the second quarter of 2019 – although, subject to agreement with the rest of the EU, the deadline could conceivably be extended. Given the current rhetoric from key EU politicians, however, there are few signs that the bloc’s attitude to negotiations will soften.

It’s little wonder that markets are increasingly fearful.

Indeed, sterling’s recent plunge may prove just a harbinger. Today, the UK could well be enjoying the relative calm before the real storm that lies ahead.

----------------------------------------------------------------------

Mr. Smith serves as London-based Chief Investment Officer at Brown Shipley, a member of KBL European Private Bankers. The statements and views expressed in this document are those of the author as of the date of this article and are subject to change. This article is also of a general nature and does not constitute legal, accounting, tax or investment advice.

Tax professionals already anticipate an expected onslaught of VAT changes resulting from the United Kingdom’s exiting the European Union, according to a recent poll by Avalara EMEA, a leading provider of cloud-based tax compliance automation for businesses of all sizes.  51 percent project increased complexity in VAT compliance, and paying more in VAT and customs (68%).  While 53 percent of those polled expect substantial impact on their businesses, more than half have not yet begun planning for Brexit at all (54%).

“Now more than ever, VAT automation becomes key to ensure businesses are prepared for the new requirements of Brexit,” said Richard Asquith, VP of Global Indirect Tax, Avalara EMEA.  “While the timing remains uncertain, businesses can start to prepare now by ensuring they are set up with the right technology.  VAT automation platforms ensure organisations remain compliant with regulations and do not suffer the burden of huge losses in the midst of navigating a new trade environment.  Updating systems now can ensure a seamless transition once Brexit arrives.”

The poll also uncovered the following findings:

• 49% predict Brexit will happen by the end of 2020, a ‘soft exit’
• Half anticipate the UK will adopt a Canadian trade model (World Trade Organization/Free Trade Agreement)
• Poll respondents believe that the highest risks Brexit will bring for the industry include:
  • 63% - Preparedness of HM Revenue & Customs
  • 55% - Increases in customs and other border costs
  • 45% - Adapting internal enterprise resource planning (ERP) systems

EU VAT Implications

Avalara anticipates many areas of shared VAT practices will be reviewed and revised as Brexit negotiations take place.  Some of those include the following:

• Legislation - Upon completion of the exit negotiations, the UK will no longer be required to follow the EU VAT Directive or European Court of Justice (ECJ) rulings. Instead, the UK’s VAT Act will take supremacy. The UK government will be free to amend the Act to reflect its fiscal policy objectives.
• Exit from the single market - The major VAT change for UK companies following Brexit will be the loss of their intra-community trading status. Instead of zero-rating B2B sales to EU companies, transactions will be treated as imports into the EU, and subject to EU VAT.
• UK to join the EEA? - It is possible that the UK could become a member of the European Economic Area, which participates in the Single Market encompassing the free movement of goods, services, people and capital. This would give the UK many of the benefits of free trade with the EU, although it would lose the right to have a veto or vote over any EU laws passed that are imposed on EEA members.  The EEA does not cover indirect tax, so the UKwould remain outside of the EU VAT regime.

• Freedom to set UK VAT rates - The UK will no longer be constrained by the EU VAT Directive on setting its VAT rates. The UK will therefore be uninhibited to change reduced VAT rates on key products like domestic fuel, women’s sanitary products and e-books.
• EU VAT recovery - UK companies will lose the right to use the simplified 8th Directive online VAT recovery system for their EU VAT reclaims. Instead, since they will be non-EU companies, they will have to resort to the paper-based 13th Directive regime. This is slower, and prone to challenges from the tax authorities.

For more information on Avalara and ongoing news on Brexit and the tax industry, please visit www.vatlive.com. 

Poll conducted on 13^th September 2016 at Avalara’s VAT Summit with 60 VAT specialists.

UK Services PMI has risen by the 5.5 points to 52.9, the biggest ever jump in the survey’s 20 year history.

The rise is a sharp bounce back from the 47.4 reading taken in July in the immediate aftermath of the EU referendum.

The pound jumped almost a cent against the dollar on the back of the news.

Laith Khalaf, Senior Analyst at Hargreaves Lansdown comments:

‘The service sector is the engine room of the UK economy, so a return to form represents a welcome vote of confidence in the country’s financial prospects. With parliament now back from summer holidays, the serious business of negotiating withdrawal from the EU begins in earnest. Brexit is going to be a lengthy process, with plenty of ups and downs along the way, so economically speaking it’s still way too early to start counting any chickens just yet.

It’s also worth bearing in mind that dramatic bounce-backs are often a reflection of the depths of previous despair, rather than of optimism over the future. In terms of services output, today’s reading is simply in line with survey results earlier in the year, and it is last month’s sharply negative reading which is the outlier.

Since the referendum economic indicators have by and large held up pretty well, and if the positive mood music continues that should put a spring in the step of the pound on the currency markets. More robust economic data would also make the central bank think twice about any further loosening of monetary policy, and may also play its part in determining the future of austerity, as we approach the new chancellor’s Autumn Statement later on in the year.’

(Source: Hargreaves Lansdown)

Today the Bank of England has decided to take on the role of a supportive friend following Brexit with a 0.25% rate cut (from 0.5%) and some more quantitative easing. That’s basically when the Government prints money and flushes it into the economy, trying to give it a double espresso. What does this mean for the rest of us?

Savers
It’s another nail in the coffin for savings rates. Any saver who had hoped that we might revert to a time when you actually got paid some meaningful interest for holding money in a savings account will be sadly disappointed. Santander’s 123 account is still probably your best bet for cash balances of £3,000 – £20,000 in an easy access account. They have a £5 monthly account fee so check the interest outweighs the charges. Nationwide pay 5% on balances of up to £2500. But do keep an eye on things over the next week as we’d expect to see changes. More recently NatWest has told business customers that it might charge them for the privilege of holding their cash – welcome to negative interest rate discussions which feel counter-intuitive to the world order we know!  Watch this space….

Investors
Stock markets have generally liked interest rate cuts. Why? Well the basic thinking is that it’s cheaper to borrow for businesses, so companies large it up and hire more, build more and make more. And customers are more likely to go on spending sprees.

To all those cheesed-off savers: although the stock market bounces around, you can still get about 3% – 4% in income every year from some funds and stocks in the UK. This income is what we call a yield. And as well as the income (not guaranteed or fixed rates) you also have exposure to the investments themselves. Which can go up and down.

Have a look at this for details on Equity Income funds we like. 25% of Brits stick in cash and are suspicious of the stock market, but interest rates are at 300 year lows!!!

So is it time for a Plan B!? We think that for those of you in this suspicious camp with savings horizons of five years plus (Junior ISAs, pensions, ISAs earmarked for goals at least five years off…) – well, it could be time to take a deep breath and to stick a toe in the investment waters.

If you don’t understand markets and don’t want to understand them, that’s cool. Here’s how you can sort this quickly and painlessly without getting ripped off. Welcome to the investment ready-meal. A fund. Let someone else choose and blend the ingredients for you.

Homeowners
The cut may mean slightly lower mortgage rates, but in practice, they are so low anyway that it is not likely to make the marginal difference for the actual housing market. In practice, the housing market is much more likely to be influenced by consumer confidence (which is very weak), stamp duty rates (which are very high) and employment levels, which are reasonably stable for the time being (though there may be some nerves over job prospects in the wake of Brexit). The housing market is slowing and this is likely to continue.

Borrowers
If you’re in the market for a mortgage, do have a look at some of the fixed rate deals out there. Debt is cheap. It’s never been so cheap. So make sure any new mortgage OR your existing one is properly cheap!!!

Nevertheless, the usual rules apply. Loans still have to be paid back, and not all debt is created equal – credit card and overdraft debt is still very expensive, for example. You still need to check your rates and make sure you’re getting a good deal.

There is a valid question over whether all this tinkering by the Bank of England will work. Interest rates are already cheap, and may not significantly alter the behaviour of consumers or companies when we’re all scratching our heads over Brexit and wondering how the flipping hell this is all going to play out. Equally, it could be said to send a bad message. Are we supposed to believe everything is normal when these emergency measures are still in place? Time will tell...

(Source: www.boringmoney.co.uk) 

Retail investors withdrew £3.5 billion from UK investment funds in June, according to Investment Association data released today.

By comparison, in the worst month of withdrawals during the financial crisis, January 2008, retail investors withdrew £561 million from UK investment funds. In October 2008, just after the collapse of Lehman Brothers, retail investors withdrew £493 million from UK investment funds. Total assets under management are now around twice as high as they were back then, but June 2016 was still an exceptional month for outflows.

The exodus was led by investors in the property sector, who withdrew £1.4 billion from these funds, leading to some funds suspending trading, and others imposing hefty dilution levies on those who did want to sell.

£2.8 billion was withdrawn from equity funds across the board, with £1 billion of net withdrawals from the UK equity sectors.

£464 million was also withdrawn from ISAs over the course of the month.

Laith Khalaf, Senior Analyst at Hargreaves Lansdown comments:

‘The scale of the exodus from investment funds in June is quite extraordinary, with the Brexit vote eclipsing the financial crisis in terms of putting the frighteners on retail investors in the short term.

The property sector saw the biggest outflows, as investors flocked to the emergency exits, concerned that the economic effects of leaving the EU would damage commercial property prices. Since the vote some property funds have been forced to suspend trading because of the high level of outflows, with others imposing high transactional charges on those wishing to sell. UK and European equity funds also saw heavy outflows over the course of the month, with fixed interest and absolute return funds being the main beneficiaries.

Clearly investors were rattled by the referendum, and switched out of assets they perceived to be at risk from a vote to leave the EU. UK investors who withdrew from equity funds are probably regretting this decision in light of the performance of the stock market since the referendum, and that goes in spades for those who cashed in their ISA allowance, losing that tax shelter forever.

This demonstrates the danger of events-based investing, because even if you do happen to guess the correct outcome, you still might not be able to predict the effect on markets and asset prices.

When it comes to elections and referenda, investors are better off voting with their polling cards rather than their finances. In these situations it pays to keep a cool head, to ignore the inevitable clamour, and to take a long term view on your portfolio.’

(Source: Hargreaves Lansdown)

Ultimate Finance Group, a leading independent provider of finance to UK business, announced that its total loan book to the UK’s SME sector has exceeded £100 million, with significant further funds available to businesses looking for support during this time of post-Brexit economic uncertainty.

Ultimate Finance’s loan book has increased by a third in the last 12 months, a period of record growth for the business. At a time when the vote for Britain to leave the EU is causing unease across the business community, Ultimate Finance’s commitment to support UK SMEs is stronger than ever as it begins ambitious expansion plans.

“The vote to leave the EU has caused concern for a number of our clients and for the wider business community,” explained Ron Robson, chief executive officer of Ultimate Finance. “We remain fully committed to supporting UK SMEs, and with the strong financial backing of our parent organisation, Tavistock Group, we have significant resources available to us, a strong appetite to lend and a tremendous team of people to provide the outstanding service our clients deserve.”

“In uncertain times it is vital that businesses have stable and reliable funding partners that they can rely on and who will not, as the cliché has it, “remove the umbrella when it starts to rain”.  In Ultimate Finance, our clients have that strong, reliable and knowledgeable business partner who will support them through whatever challenges lie ahead.”

“As part of Tavistock Group we have access to significant financial resources and are not dependant on financial markets or banks for our funding.  As a privately owned business ourselves, we understand the realities and pressures facing our clients and stand alongside them.”

According to Robson, the £100 million landmark is just the beginning for Ultimate Finance:

“We have ambitious growth plans that will see us strengthen our position across the traditional areas of Asset, Invoice and Trade Finance whilst also bringing an exciting and innovative pipeline of new products to market to address the changing needs of UK businesses.  We will continue to extend our geographical reach, providing a locally based service, backed up by the strength and commitment of a national business.”

Ultimate Finance already offers a wide range of lending-based products that allows it to offer a tailored solution for virtually any business.

“At heart and in action, we are very like the clients we serve,” concluded Robson. “We are a lean, flexible and helpful team that specialises in giving small and medium sized businesses the support they need to respond swiftly to changing situations. With ample funds to lend, a passion to see our clients succeed and experienced staff that have the freedom to use their own initiative, we are in a great position to ease post-Brexit business woes and surpass our own ambitious expansion plans.”

For further information please visit: www.ultimatefinance.co.uk 

The latest figures from the Lloyds Bank Investor Sentiment Index show a substantial drop in investor confidence, post the results of the EU Referendum. After two consecutive months of improved sentiment, the mood among investors is now at its lowest level since the Index began in March 2013 and has turned negative for the first time.

Perhaps unsurprisingly, investor sentiment is increasingly negative to those asset classes exposed to the UK, with equities and in particular UK property falling sharply into negative territory (declines of 21.75 and 35.36 percentage points respectively). UK gilts also saw sentiment decline steeply, showing a drop of over 15 percentage points.

Sentiment towards cash has also seen a slight fall, and although last week The Monetary Policy Committee voted to leave rates unchanged, there is speculation that the Bank will take some action next month. Inflation expectations in the UK have risen following the fall in the value of sterling, raising the prospect of some price increases, particularly for dollar-based goods.

The continuing flight to safe havens has helped maintain and further the allure of gold, which has seen the greatest positive swing of 16 percentage points. Those assets classes which are typically seen as riskier and less familiar to many investors – commodities, emerging markets and Japanese equities, have also seen sentiment improve as investors look further afield from those asset classes they think may be most impacted by the UK’s split from the EU. Although overall sentiment to Japan remains in negative territory, speculation has also grown that Prime Minister Shinzo Abe is contemplating helicopter money to revive the country with consumption vouchers for lower-income workers to be introduced as a combination of monetary and fiscal policy.

Markus Stadlmann, Chief Investment Officer at Lloyds Private Banking, says:

“We have seen strongly declining sentiment from investors in the aftermath of the Referendum. Initial reactions were clearly very negative to UK assets, although we did see some investors coming back to the table to buy back into UK shares following the initial sell-off.

“We would expect investor sentiment to continue to be susceptible to sharp, short-term shifts as investors absorb the news flow over the next 2-3 months.

“One area where sentiment and market performance have moved in tandem is commercial property, and this is an asset class where we remain extremely vigilant, particularly around issues such as liquidity. Our client portfolios remained resilient over this period, as we had moved away from credit risk and built US positions relative to European exposure.”

Despite the sell-off in the wake of the Referendum, UK equities actually showed positive performance for the month ending on the 1st July. UK gilts rose nearly 5% in this period, whilst UK corporate bonds rose 2.9%. Gold was the strongest performer with a 10% increase, whereas Japanese equity declined 7.5% and UK commercial properly fell by over 10%.

(Source: Lloyds Banking Group)

Fluctuations in the real estate market caused by the UK’s vote to leave the European Union are likely to be shorter-lived and less severe than many investors fear, according to LaSalle Investment Management’s mid-year Investment Strategy Annual (‘ISA’) 2016.

The correction in real estate pricing is expected to be largely restricted to the next 18 months, and medium-term capital inflows into real estate will only be interrupted, not reversed, the ISA finds. It also suggests that, given the ultra-low interest rate and bond yield environment, UK real estate yields are only expected to increase by 40-50 basis points by the end of 2017, even if the country’s political landscape remains unclear. Meanwhile in Continental European, investors will continue to edge up the risk curve as long as the economic recovery continues largely unaffected, but will have one eye on risk contagion from the UK.

Overall, the ISA suggests that some of the fears currently surrounding the real estate market in the country may be overdone. Other findings include:

-The overall impact of Brexit on the Private Rented Sector (PRS) should be limited given the ongoing undersupply.

-Real estate assets with long, index-linked leases are likely to outperform over the next few years.

-The predicted capital market re-pricing will lead to an opportune time to enter the UK market – particularly for US dollar-denominated and Japanese yen-denominated investors.

Elsewhere in Europe, the headwinds facing London’s financial markets should help support the real estate market in cities such as Frankfurt, Paris, Dublin, and to a lesser extent Amsterdam and Madrid. Even before the impact of Brexit, office demand across Europe was undergoing a strong renaissance in cities with strong trends in Demographics, Technology and Urbanisation.

Globally, the ISA says the lower for longer situation actually boosts core real estate returns in the short-run, even as it dampens the long-run outlook for rental income growth.  As a result, real estate values for stabilized assets in major markets outside the UK may continue to increase or hold steady, but the cyclical recovery in fundamentals will be moving much more slowly now.  At the same time, cross-border and domestic capital sources in many countries could narrow their range of target investments to focus on these traditional, core themes.

Jacques Gordon, Global Head of Research and Strategy at LaSalle, said: “Across the globe, the fundamentals of supply and demand appear to be well-balanced going into the second half of the year in most of LaSalle’s major markets. Furthermore, turmoil in capital markets might also open higher-yielding buying opportunities from distressed sellers as the implications of the Brexit vote in the UK ripple around the world.  Although the UK has been the epi-centre for political and financial tremors since June 24^th, the law of unintended consequences suggests that investors should also closely watch for ripple effects in the EU, North America and even all the way to Asia-Pacific.”

Mahdi Mokrane, Head of Research and Strategy for Europe at LaSalle, said: “The UK, and in particular a dynamic London, home to one of the world’s most liquid, transparent, and investor-friendly real estate markets, is likely to reinvent itself outside of the EU, and the overall prospects for the UK outside the EU could well be broadly more positive than what is implied by current market commentators.

“We expect the forecast correction in real estate pricing to be largely restricted to 2016-17 and medium-term capital inflows into real estate will only be interrupted rather than reversed”.

(Source: LaSalle)

Sterling has encountered significant losses in recent days with the increasing support for anti-EU theme from the recent ORB polls conducted regarding the referendum. More than 55% of voters showed their support for leaving EU while only 45% were interested in staying back with EU. The important point to note here is that price action has been driven mostly by change in market sentiments based on results from poll data. The volatility of GBP has consequently increased since the announcement of referendum and has dropped to its lowest levels as last seen in 2008.

GBP has been performing very bad especially against dollar and GBP/USD reached its all-time-low level of around 1.39 during the month of February 2016. It was the time when initial talks about referendum came into picture that caused huge fears among the investors regarding the financial instability of UK. Based on technical analysis from the options market, there is 72 percent chance of GBP/USD pair trading anywhere between 1.32 and 1.51, by June 24th once the results of the referendum are announced. The GBP/EUR exchange rate is meanwhile expected to range between 1.33-1.35 after the voting.

The topic of British Exit from Europe has been discussed for years and became popular during February 2016 after Prime Minister David Cameron promised to conduct a voting for the same by June. Though voting will be held on June 23^rd, it will not result in immediate departure of UK from the European Union. It would commence a multi-year negotiation period on the terms for exiting EU.  Based on polls conducted during last few months, there has been mixed results on the majority’s bias with some polls showing minor leads on either side. The below table from Wikipedia shows the results of various polls conducted regarding the referendum,

Britain has always remained a semi-detached member of European Union and most of the British bureaucrats believe that they can do better alone. Some of them are frustrated by the fact that EU gets benefited more from the UK than UK from the EU.  The recent economic problems of some EU members like Greece have caused huge disinterest regarding the EU membership among British investors.  Though pound has decreased significantly against USD and the trading is done based on shifting expectations for the referendum, GBP/EUR is showing a longer-than-average bullish day’s range as of June 15^th, which is giving a positive outlook for trading GBP. It is an early sign for positive impact on GBP in the currency market, after the steep decline experienced in recent days. The important fact to note here is that Brexit will not only affect GBP, but also Euro.

Based on certain analysis reports, UK leaving the EU could result in loss of more than 950, 000 jobs by 2020 and deficit around £100 billion which is around 5% of their GDP. When looking at possible impacts for each decision, it is important to note that whatever significant ground lost in recent days is likely to be made up relatively fast once the business gets usual after the referendum. But even before voting, many investors are selling GBP as risks are associated more with the decision. If we look at the current account deficit of UK, it clearly indicates that GBP is becoming weaker. UK has a current account deficit of more than 5 times its GDP, which is the worst for any developed nation making this a strong reason for sterling’s weakness in currency market. In the coming days closer to referendum, we can expect to see sterling respond less to economic reports of UK and trade based on Brexit-related updates.

Any pro-Brexit pool can result in further decline of GBP and anti-Brexit news could cause an upward trend on GBP. If the Brexit vote becomes positive and pound hits the lows, it will be a good time to buy GBP as it will definitely bounce back after some time. The Bank of England might come for rescue by announcing interest rate hike to generate a positive sentiment among the investors. Euro will also face downward pressure, if the Brexit vote becomes positive and is already witnessing some volatility based on the poll results.  Trading GBP amid this volatility is a risky affair for currency traders since none of us have a crystal ball. Since the vote is currently too close to call, it might be sensible to lighten up your exposure ahead of the referendum.