Helping your clients to stay the course
02 February 2017 | Neil Cowell
Brexit is pushing the pound down! So inflation is going up! Which means interest rates are going to rise! So bond markets are going to fall! What should we do?
If you read the financial press, these are the messages you will have seen. You might even be getting similar questions from your clients. And this is where your job as an emotional circuit breaker and behavioural coach can really come into its own.
Let's look at the facts. Brexit has pushed the pound lower against its main trading partners over the past few months – just ask anyone who's been skiing recently – but will that trend continue?
The Government will be triggering Article 50 shortly and that will launch a long – two-years-plus – process of negotiating trade deals. Those negotiations will have their ups and downs and my guess is that sterling will have good days and bad days along the way.
Will we be able to tell when the good days and bad days are going to come? No.
Next: Is inflation going to rise? Well, the mechanics of a weaker pound, combined with a modest rise in the oil price, mean that inflation is likely to rise above the Bank of England's 2% target this year. Vanguard's forecasts suggest that it could be approaching 3% by the middle of next year.
So yes, inflation will probably rise from here, but the likely increase is not out of the ordinary in a historical context and doesn't necessarily mean that the Bank of England will raise interest rates.
In fact, Bank of England Governor Mark Carney recently said that the likelihood of rates rising, staying unchanged or falling from here is 'balanced' – a statement that surely reflects the uncertainty of the coming Brexit negotiations better than most.
Putting all of this into the mixer, then, what's going to happen to bonds? And, more importantly, what should you be advising your clients to do?
Well, sterling's path is unclear; inflation may well rise, but not significantly; the Bank of England is not giving us much guidance on interest rates. And on top of this, there's not a straight relationship between any of these factors and bond markets anyway.
The reality is that we don't know what's going to happen to bond markets. Nobody does. And even if bond prices do fall, it's not all bad for investors because those who sit tight will be rewarded over the long term in the form of higher yields. Meanwhile, those who sell could be realising short-term losses and will probably be switching into a higher-risk asset such as equities at a time of considerable uncertainty.
So, the best way to add value for your clients is to remind them why they hold equities (long-term growth) and why they hold bonds (diversification and balance). Help them to tune out short-term noise and focus on what they can control. Have their goals changed? If not, why should they change their asset allocation?
This information is directed at professional investors and should not be distributed to, or relied upon by, retail investors. It is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.
This information is designed for use by, and is directed only at, persons resident in the UK.
The material contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.
The information in this article does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this article when making any investment decisions.
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
The opinions expressed in this article are those of individual author and may not be representative of Vanguard Asset Management, Limited.
Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.