Market Perspectives - Quarter 2 2016


• Investor risk appetite increased for the fourth consecutive month as equity and oil prices continued to rebound from their mid-February lows.

• A weak May employment report in the US pushed back projections for the next rate hike by the Federal Reserve (Fed). With economic data mixed, markets seem supportive of a delayed rate hike path.

• Towards the end of the quarter we have seen more volatility in the UK and European markets. This culminated on the 24th June, a day after the historic vote which saw the majority of voters in the UK express a desire to leave the European Union (EU). The Pound Sterling dropped to a 30 year low and equity markets worldwide have seen substantial losses. Since then, in just a few days, markets have recovered considerably, with FTSE 100 being at about its pre-Brexit level.

Market Commentary Q2
The second quarter of 2016 has been a period of recovery after the turbulences related to China in the early part of the year. Global equities posted positive returns, with developed equities leading the way. Investors focused more on risky assets, trying to compensate for the lack of growth achieved thus far.

The Federal Reserve (Fed) remained dovish, waiting on whether they would increase interest rates. The decision will be based on upcoming data in the summer months on how the US economy continues to perform. An aging society, slow productivity and Brexit have been the main concerns announced at the Fed meeting in May. Conversely, the other major central banks – Bank of Japan (BoJ) and European Central Bank (ECB) – have left their loose monetary policy with negative interest rates and large quantitative easing (QE) programmes unchanged. Specifically, in Japan investors fell short of expectations when the BoJ did not take any further policy action in April, leading to a sharp rise in yen and stock market volatility.

Oil price stabilised after the fall in Q1 and headed to $50 per barrel on the back of production outrages (e.g. wildfires in Canada) and more evidence of supply side response in the US. Oil production has fallen for three consecutive months as the number of oil rig counts in the US was substantially reduced.

In the last days of the quarter, we have seen a sudden change of pace with Britain voting to leave the EU. This outcome was completely unexpected by the financial markets, which explains such a dramatic reaction on the 24th June, a day after the election when the results became known. An immediate consequence was a free fall of the Pound Sterling which hit a 30 year low on Friday, the largest drop on record, and continued to decline further. All the major global equity markets plunged, with European markets the worst affected. Investors have instead been pouring into safe haven assets such as gold, gilts and the yen and this trend may continue for the next few weeks and months. Nevertheless we have seen a substantial recovery in markets, in particular the UK main index FTSE 100 has risen to the level comparable to the pre-Brexit days. Overall almost all major markets finished the 2nd quarter with positive returns.

Market Outlook
Inevitably the Brexit event will shape the coming quarter, particularly in the UK and the rest of Europe. At the moment there are too many questions unanswered, but it is evident that this act will lead to profound and protracted political and economic uncertainty.

Weaker pound will have a significant impact on the UK economy, making imported goods more expensive, including items like heating, fuel and petrol. Jobs may also be initially lost as companies feel they may need to relocate to Europe to make sure they can still benefit from free trade and movement of goods and labour across the EU. The general opinion is that the UK withdrawal will have a negative impact on the UK and EU economic growth due to increased uncertainty and reduced consumer confidence amongst other structural problems. Levels of market volatility are expected to remain high; downward pressure on UK and EU equities could be repeated until the issues surrounding the future of UK and EU are resolved.

The Bank of England’s first priority will be to provide ample liquidity to avoid any funding stresses. It may cut interest rates, mitigating the overall adverse impact, and the magnitude and volatility of the British pound’s fall will likely dictate further responses. The forecasts are that the central bank may cut its 0.5% policy rate to zero soon. If the negative economic impact looked significant, the ECB would likely expand its asset purchases, reducing the risk of a worse than expected economic outcome.

Even though the stock market has recovered, we think that Britain’s leave vote poses risk of declines in global shares and other risk assets, and we are particularly mindful about domestic UK companies whose revenue is earned onshore. Yet indiscriminate selling could spark opportunities. This could be UK listed stocks that benefit from pound depreciation (72% of FTSE 100 revenues are earned abroad). Besides, US and Asian markets are only marginally affected by the UK’s exit from the EU, and are supported by a mix of easy monetary policy and economic growth. Investors should focus on assets with relatively attractive valuations and positive fundamental drivers, such as quality stocks, dividend-growth stocks and investment-grade bonds. Bottom line: post-Brexit, selectivity and caution are key.

Selected market indicators

Region/ Asset Class


To June 30th 2016




Global Equity

MSCI World





MSCI Europe





Nikkei 225




Emerging Markets





United States

S&P 500




United Kingdom

FTSE All Share




Global Bond

Barclays Global Aggregate









*Gross return, local currency. Source: FE Analytics.