It has now been a few weeks since the results of the UK’s referendum relating to the EU and as the dust starts to settle we may have a little more idea of the long terms effects. I am always reluctant to make any kind of financial prediction, especially with such an unknown political landscape, but I think it would be useful to cover a few topics that may affect many people on a personal financial level.
After the manic stock markets in the days after the unexpected result, we have seen slightly calmer trading but that is only part of the picture. This article is intended to give some insight into how these changes in the UK are affecting individuals and any action that can be taken.
Right now there are still more questions than answers but I can at least attempt to discuss some of the topics.
Is this not a UK only issue?
We live in a global society and financial effects have already been felt across global stock markets. The changes in exchange rates are affecting spending power already. You don’t have to be British, or a UK resident to own property in the UK, to have assets in Sterling or to be affected by the ripple effect in a major financial market.
UK Interest rates
It is predicted that the Bank of England will cut the base rate from the already low 0.5% down to 0.25%.
For anyone with a tracker mortgage, they can expect to see the rate fall although there is little margin to go much lower. Expat mortgages may become fractionally cheaper but due to the perceived extra risk lenders are still limiting the options and charging higher rates of interest. (Speak to my in-house mortgage department for the best options.)
This is bad news for savers as the already very low interest rates on deposit accounts will be cut further. The fixed rate bond market has also been hit.
UK property market
There is a general expectation that UK house prices will fall, with some pundits saying by up to 10%,but this is a mature market so if you have bought property as investment, or own a home there, you should hold tight. As with any other asset classes the value of property can fall as well as rise but no one expects a collapse.
Many economic experts have been saying that the UK property market is overpriced so this is possibly an overdue correction. Recent figures have been affected by a rush to buy investment properties before the stamp duty change but we could well see falls in the short to medium term.
If you plan to buy UK property you could wait and see if prices do fall, but there are no guarantees and in a falling market mortgages can be harder to obtain. On the other hand, if Brexit does reduce demand then it may be possible to get a good deal, albeit for a limited period. If confidence returns and we don’t slip into recession, then we can expect to see increased demand again. Property ownership in the UK, due to the high attendant costs and reducing tax benefits, should be a long term investment and not driven purely by market sentiment.
How is the UK stock market performing now?
After the scary fluctuations of the first couple of days after the Referendum result the FTSE 100 Index has stabilised somewhat but that is only part of the story. The FTSE 100 Index, which include the largest 100 companies listed on the London Stock Exchange, is used as an easy measure but UK investments cover so much more.
There is also the FTSE 250 index, which contains house builders, retailers, transport companies and other stocks focused on the domestic economy, which in recent years has outperformed the blue-chip FTSE 100 with its oil companies and miners suffering from the collapse in commodities prices.
At one point the two major indices tracked each other quite closely but began to diverge at the beginning of 2013 with the 250 performing better. Since the EU referendum, that trend has reversed sharply. The 100 is up by some 4% in the two weeks since the vote but the 250 has fallen by 6.7%. This decline is almost entirely attributable to fears over the UK economy.
The weakening of Sterling will affect companies and few of the major companies in the FTSE 100 are purely domestic. That leaves them open to the effects of currency fluctuations so we can expect to see further volatility, albeit this may be fragmented by sector.
General view seems to be that the US economy is strengthening but there are concerns about the possible devaluation of the Chinese Yuan and a potential Italian banking crisis. Not all issues will be Brexit related.
Should I keep my investments in Sterling?
If you intend to live in the UK in the future, retire there and thus spend in British Pounds, it makes sense to continue investing in Sterling denominated investments. The concern is really if you need to move Sterling to another currency in the near future.
I cannot cover all scenarios in this article but if you have specific concerns regarding your investments, please contact me for personal advice.
You may have heard that there are issues with a number of commercial property funds. This started with the suspension of trading in the large Standard Life Property Fund and was rapidly followed by a number of others. The UK property sector has been badly hit by Brexit and the prices of shares in both companies, unit trusts and REITs (specialist property funds) have been badly hit.
If you have monies in any of these funds there is no major cause for alarm and we have seen this happen before. If you are invested in these funds as part of a balanced portfolio you just need to sit tight as the “gating”, the latest term for limiting access, is a measure taken to reduce outflows. The underlying assets are still there and in the past investors have not lost out if they sit and wait it out and have still made money. I plan to write about this more in the next couple of weeks.
How does it affect us in the UAE?
The obvious main benefit is a weaker pound so that anyone paid in UAE Dirhams who remits money to Sterling is getting a better rate of exchange and thus “more for their money”. This makes it easier to repay debts in Sterling, purchase assets or pay for goods in the currency. It also means that the cost of importing goods from the UK to the UAE should become cheaper over time so we might see a reduction in the price of some goods.
The reverse is true for tourism as the weaker pound and stronger US Dollar makes it more expensive for many visitors. In 2015, some one million people visited Dubai from the UK but as the pound has already fallen 15% against the US Dollar, which is pegged to the UAE Dirham, is expected to remain weak for some time this is likely to have an impact not only on the numbers of visitors but also how much they will spend whilst in holiday in the UAE.
Should I be transferring my money to Sterling?
I never encourage currency speculation but if you will require cash in Sterling at some point, or you are a UK national sending money home, when converting from the Dirham you will be getting rather more for your money. The rates are better than they have been more many years but considering all the uncertainly Sterling could weaken further, especially as it could be undermined by a strengthening US economy.
I have no concerns that Sterling will collapse but I do expect it to be weaker for some time. Expats need to be aware of any tax liabilities when moving money to the UK and offshore investments and bank accounts in a secure jurisdiction are best. (Ask me for more details.)
If you decide to transfer money, be smart and seek out the best rates with the lowest or no fees. A straight retail bank to retail bank transfer is rarely a good option as few banks offer competitive exchange rates and you’ll often only find out how poor it is after you have made the transfer. Better to use a properly regulated and specialised currency exchange company, especially for amount in excess of AED 10,000. This is the case for transfers to and from any tradable currency so ask me for details of the company I use personally and recommend to all my clients.
What about my pension?
If you have not taken benefits then you need to carry in investing, perhaps reviewing the underlying investments, although that should happen regularly anyway. If this has not been happening see this as a wake-up call and speak to an independent adviser for a proper review.
If however, you are receiving a pension income in Sterling and need the money in UAE Dirhams, or another currency, you will feel the effect immediately as you’ll have less in your pocket. There is little you can do about this as exchange rates move all the time, just not often as far and fast as Sterling has fallen recently.
What happens next?
I am not sure that anyone really knows as we are in unknown territory. Leaving the European Union will hit economic growth in the UK, leading to increased inflation in the shorter term at least. We may also see job losses and increased national debt even though the UK was the best performing developed stock market in Q2 of 2016.
It is not all doom and gloom, provided you can be patient. Recovery will not be overnight but the fundamentals are largely good. If you are suitably invested these issues should not be keeping you up at night.
The saviour may be Sterling itself. It has a long history of coming to the rescue and a floating currency acts as an economic shock absorber, repricing countries so that they remain competitive. Despite the current weakening Sterling remains a major global currency with London in particular being a major financial centre responsible for nearly a quarter of the UK’s Gross Domestic Product (GDP). This regional imbalances within the UK may be rebalanced by the weaker currency and that bodes well for the long term.
It is not easy to be optimistic right now but the UK economy is sound and with time, we should see recovery provided we can wait out the short term pain. Investments and property should not be for the short term but if you have any concerns about your assets and investments then a discussion and review may be of interest.
For more information on managing investments as well as expert advice on any other financial planning issue please contact me at firstname.lastname@example.org
We discussed this and holiday spending on the Dubai Today show on Dubai Eye 103.8FM on 11th July, podcast here: Dubai Today on Dubai Eye 11.07.16 Brexit & holiday spending