Why were many UK portfolios up the day after the referendum?

People with portfolio denominated in Pound Sterling but held within a diversified portfolio of overseas stocks and bonds, alongside some GBP denominated assets, might have witnessed something unexpected the day after the referendum.   Despite seeing markets tumble, accounts in Pound Sterling terms were up even before the recover in stock prices seen in the last few days. The only funds that were down were FTSE funds.  Government Bonds and pretty much all non-UK funds were up in Sterling terms.

There is a very obvious reason for this:  the pound fell more dramatically than the foreign stock markets, which means that in Pound Sterling terms most overseas funds increased in value.  Let me give you a simple example.  The Japanese Nikkei went down by 7%-8% in one day, however the Yen went up by 10%-15% against the pound in the same period, meaning that the price of Japanese funds in GBP has skyrocketed.

The following graph shows how for Pound Sterling investors, Japanese funds have been hitting highs not seen for about a year.  Emerging market, European, American and many other funds have seen similar trends.  The Dow is now at about 18,000, but with the pound at around 1.32, for UK investors that represents a big gain compared to the Dow at 18,200-18,300 and the Pound being at 1.45.

This brings into question one common piece of advise which seems sensible on face value, but isn’t always that sensible.  The idea that UK residents and even UK expats who are planning to retire in the UK can just invest in a FTSE all stars account, and don’t need a globally positioned portfolio, because most UK firms on the FTSE 100 at least get most of their profits from overseas.

What the current events show is not only the importance of having bonds in the portfolio, but also the importance of having funds held outside the UK, in Europe, Japan, America and the Emerging Markets.  This allows investors to ride out currency devaluations and can protect investors from big falls.

Beyond this point about being diversified with bonds and stocks, the events in the last week once again show us that nobody can predict the future and there is never a best time to enter markets.  After the vote, the Bank of England has indicated there may be more QE and lower interest rates.  The FTSE 100 is now at year highs, albeit in Pound terms, whilst pretty much all international markets are at year highs in Pound terms.  Those leaving cash in the bank have been the biggest losers, especially expats who are using their savings to buy goods overseas using GBP.

In the bigger picture, it seems that Central Bank may need to keep monetary policy looser for longer.  This has made investors speculate that planned interest rate hikes and the end of QE will need to be delayed for at least a year or two, therefore markets will get a shot in the arm.  As always with predictions, nobody knows, but it does seem the world has once again changed in unexpected ways in the last month.

 
Adam Fayed