Life after ‘Brexit’

Pile-of-dollarsGlobal stock markets plunged after the result of the UK’s ‘Brexit’ referendum, but not that long after, bounced back.  That said, there is still a lot of concern around the UK leaving the European Union – especially for the longer term.

What should investors do? Simple, they should be on the lookout for more geopolitical upsets (the attempted coup in Turkey, for instance) – but remain invested.

It’s going to be difficult to get an income from government bonds. The outcome of the UK referendum meant that investors rushed to buy these bonds, pushing up their prices and causing their yields to plunge.  Take Switzerland for example.

A couple of weeks ago in the land of the cuckoo clocks and chocolate, yields on all government bonds (yes, even those for 50-year bonds) turned negative.  So if investors want to lend money to the Swiss government for 50 years, these investors must pay for this! But why? – I hear you ask. Answer: Lack of confidence in the global economy.  Rather than stash the cash in their mattresses, investors will pay the Swiss government to hold their money. Something similar is happening to bond yields in Japan and Germany.

The worst long-term bond scenario is this: those who bought these bonds at low yields could risk losing money if interest rates suddenly rise.

Where is the smart money going?  To the US it seems – where American corporates aren’t really affected by Europe’s financial markets – after all, America’s exports to the UK are only 0.6 percent of US GDP. Germany is the largest of the US’s trade partners but makes up just under 4 percent of America’s exports.

It turns out that the earnings of American companies may actually get a boost from ‘Brexit’, as following the UK referendum, the Fed looks to be putting interest rates on hold, which will push up consumer spending and promote lending.  The smart money, therefore, looks like it’s going to stay in US equities.

But what if Donald Trump wins the US presidential election in November? Don’t panic. Analysts say there is no objective evidence suggesting that who the president is should cause investors to want to change their investment strategy. Stocks will rise over time no matter who – Republican or Democrat – is in office.  If you google “stocks to buy if Hillary Clinton or Donald Trump wins”, you’ll find millions of results: ignore them.

In our September Offshore Investing Special, we’ll tell you more.



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