Budgeting for EU votes

Rowan Dartington Signature’s managing director Guy Stephens argues that with global noise muddying the waters, equities remain the best option

This Wednesday sees two competing events; the much anticipated Chancellor’s Budget and Cheltenham Festival enters its second day – both are equally wide open to speculation and disappointment with many somewhat poorer by the end of the day!

There is the distinct impression that anything of any significant substance that could alienate the Tory old guard has been removed, specifically radical changes to pensions as they may tip the balance on the EU Referendum vote as some desert their allegiance to the centre in a show of defiance.

We will never know what was originally in the Budget before the EU debate started hotting up but what we can be sure of, is that it will most likely be back on the agenda for the Autumn Statement.  This suggests that focusing on the Cheltenham Festival may be more enthralling with any headline grabbing radical policy moves delayed for at least six months.

Returning to the markets. Unfortunately the fundamentals are avoiding the focus of many with so much global noise muddying the waters.  If the investors do manage to focus on what they actually invest in, being company earnings, cash flow and dividends, they will find a reasonably robust picture where the returns from equities remain the most attractive -if one can stomach the volatility likely to intensify as we approach 23rd June.

The next best alternative to equities had been property, both commercial and residential, but there are distinct clouds on the horizon for both. Not particularly dark clouds but thick enough to cast a shadow.  In terms of residential, overseas buyers in London are stepping back in case we should choose to leave the EU, as the value of their investment will likely fall in Sterling terms.

In addition, the changes in stamp duty that come into force in the new tax year have shaken the foundations of the buy-to-let market along with the on-going inability to offset mortgage costs against rental receipts.  A step change in affordability is still someway off requiring significant price falls to spur demand and so there are areas of the housing sector that look vulnerable.  This has already been reflected in the equity market where stocks like Berkeley Group are over 17% down since the start of the year.

This also translates across to commercial property where the two weakest sectors in the FTSE All Share have been the Banks and Real Estate which are both down around 13%.  The story here is more one concerning the on-going move from ‘bricks to clicks’ but also the strength in office demand in London should we vote to leave the EU.  This weakness is probably overdone with attractive and well covered yields available and even if we vote to leave the EU, it is likely to take many years for the authorities to work out how this will be done.

Recent on-going strength in the US economy is bringing the potential for interest rate rises back onto the Federal Reserve Bank table and that is a positive.  However, China delivered a 25% fall in exports last month alerting us all to the developing slowdown scenario.  The challenge here remains as to whether we should or shouldn’t be worried.  For now, most have defaulted to the ‘best avoid for now’ in favour of more expensive certainties.  It probably isn’t a world shattering event for this year but still has the potential to cause upset.

So, for now, equities still look like the best asset class, despite the potential volatility and we wouldn’t try to be too clever this side of the EU vote.

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