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Market Pulse 2 — Investment strategy

The return of the kingWith interest rates so low, cash is not a popular choice with many

investors. Yet our analysis reveals it has outperformed equities and

bonds over certain periods in real terms without suffering any losses.

We believe cash still has a valid role within a diversified strategy.

www.kleinwortbenson.com

In this issue

5 — EquitiesMost equity fund managers adopt a regional approach within their investment strategies, but it is important to consider the impact of sectors on the market’s performance.

6 — Fixed incomeWith energy prices and wage growth likely to increase and in turn generate higher inflation and a steeper yield curve, we are maintaining a cautious approach to this asset class.

7 — CurrenciesAt the start of the year, the US dollar had fallen owing to uncertainty about the timing and direction of monetary policy, while sterling was holding up surprisingly well.

8 — CommoditiesMany investors like gold because it can provide a safe haven against market turmoil, and it has been one of this year’s strongest-performing assets.

9 — Real estateAlthough the UK’s decision to leave the European Union is unsettling for real estate markets, residential property is looking more attractive to foreign investors following the pound’s fall.

10 — Markets at a glanceAn appetite for risky assets had returned to markets during the second quarter until the shock result from the UK’s referendum.© Peter Greenwood — FolioArt

Third quarter 2016

2 — Kleinwort Benson — Third quarter 2016

by Mouhammed ChoukeirChief Investment Officer

To many, cash represents an opportunity cost, an opportunity lost. These investors believe cash is a temporary holding medium between risk-assets, held unwillingly, often for a lack of better ideas. That is a limiting, myopic view. Cash is a core asset class, not a blank canvas from which to create an investment. Sometimes – even over long periods – cash is a better investment than one or both of the other two core asset classes. Often, even if it underperforms equities or government bonds, it still delivers positive, real returns with low risk of nominal losses – a unique, compelling trait of tremendous value.

History rhymesNo decade is identical, but history does rhyme. And for investors, long-term data should serve to compensate for inherent recency biases, particularly any anchoring to the “anti-cash” mentality developed over the last few years of financial repression (ie low interest rates).

In the only completed decade of this century, cash outperformed equities in

real terms – all the while, not experiencing a single moment of negative nominal or real returns; a nice little feature to have had during the 2008 meltdown. Where the 1980s and 1990s were a roaring period for risk assets – both equities and bonds did very well – cash respectively returned 5% and 4% above inflation annually in each of those decades, and all with no fear of losses.

Perhaps of most resonance to the present is the decade beginning in 1950, the last time interest rates were as low as they are now. It is no coincidence that then, similar to today, low rates were the result of policy-driven financial repression, and were in response to a staggering build up in government debt following the Second World War. In that period, cash outperformed bonds, and would continue to over the next two discrete decades (beginning 1960 and 1970, respectively).

Equities are well known to be risky. But it is wise to remember that bonds are also a volatile asset class. Paltry real coupon income did not compensate for the falling capital values during the long three-decade bond bear market beginning in the 1950s. Furthermore, bonds – with fixed coupon yields – have

The return of the king

Market Pulse — Investment strategy

“locked-in” rates of interest if you hold them to maturity; if you do not, and rates rise, you get punished with a capital loss. At the moment, the UK inflation rate over the next ten years, implied by the breakeven rate on index-linked gilts, is 2.3%. The 10-year gilt yields 1.3%. Therefore, even if rates were not to increase, you are still subject to a guaranteed real loss. In contrast, cash tends to be much more flexible, with returns on anything from simple bank accounts to sophisticated money markets funds rising along with base interest rates.

Admittedly, there are a number of demographic (eg ageing populations, declining labour force participations rates) and structural reasons (eg savings glut) to believe why rates – and therefore cash returns – may not rise again to pre-crisis levels. However, in that case, any inflationary headwinds to the real return on cash would also be diminished, a fair compensation all else equal. Regardless, if policymakers are to be taken at face-value, we can reasonably assume that interest rates will be “normalised” at some level, safely above the inflation rate. That path is more likely to be punishing

Source: Kleinwort Benson and Barclays.

Past performance does not guarantee future performance.

Figure 1: Annualised real returns of UK assets by decade (%)Although cash is not a popular choice with many investors and often underperforms both equities and bonds, it has a valid role to play within a diversified portfolio.

This article was first published in June 2016.

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Kleinwort Benson — Third quarter 2016 — 3

for government bonds than it would be for cash.

Investment implicationsAt present, equity valuations are neither too expensive nor too cheap; of the core asset classes, they offer the highest relative expected returns. Therefore, they form our most concentrated allocation in multi-asset portfolios. Our optimism for equities, though, is tempered by a number of economic risks and earnings headwinds, and leaves us guarded. In addition, as of May 2016, the current equity bull run officially became the second longest in history. At some point, it will end. This partly explains our allocations to government bonds – which are in positive momentum; and inversely correlated to equities – even though they have a low expected return profile.

This brings us to cash. We have increased our cash allocation in recent years. One, it keeps “powder dry” for attractive investment opportunities and reduces volatility from potential risks of all kinds, including the geopolitical, such as the “Brexit” referendum. Two, it is a core asset class. It may not generate much in the way of return, but it does not lose nominal value – the most effective form of protection if and when volatility for risk-assets increases. Finally, the current “low inflation” environment does not penalise those holding cash.


Key points

• A prolonged period of record-low interest rates has put off many investors from holding cash but we believe it has a valid role to play as part of a diversified strategy.

• Our analysis reveals that cash has outperformed equities and bonds over certain periods in real terms without suffering any losses.

• Although cash does not generate much in the way of returns, it does not lose nominal value – the most effective form of protection if conditions become more volatile.



House views

Equities Neutral Although equities are reasonably valued and have attractive yields relative to other asset classes, price momentum remains negative. There is little differentiation at the regional level because markets have continued to converge.

Europe (ex UK) Neutral Although the UK’s EU referendum has put pressure on European share prices, leading to cheaper valuations, risks have increased owing to regional political uncertainty and anaemic levels of economic growth.

Japan Neutral We remain neutral primarily due to improving valuations, although uncertainties around the outcome of political reforms and an unpredictable yen remain important factors for medium- to long-term investors.

Pacific (ex Japan) Neutral We are neutral due to relative valuation and potentially oversold investor sentiment on the wider Asian region.

UK Neutral We remain neutral largely based on relative value. However, with a yield above 4%, the UK remains one of the best markets for investors seeking income. The results of the EU referendum have left shares cheaper globally, but with increased risks.

US Neutral We remain cautious. Strong outperformance in recent years has led to expensive valuations relative to other markets, creating potential for underperformance. Yet the US continues to serve as a more stable equity allocation and liquid source of funds should we seek to reduce overall equity exposure. Macroeconomic and monetary policy factors continue to be in balance.

Emerging markets (EM) Neutral We remain neutral given high volatility and recent outperformance. Valuations continue to evolve as earnings have fallen over the past few years, but shares remain cheap on simple valuation measures.

Government bonds Negative Government bonds were expensive by most measures, and have become even more so following the UK’s referendum. Moreover, a rising yield environment will probably put capital at risk in the medium to long term. Nonetheless, we continue to hold government bonds in multi-asset class portfolios for diversification and risk management purposes.

Conventional Negative We are maintaining a short duration stance given the poor valuation of conventional government bonds. Yet in a multi-asset context, they are important to help control portfolio volatility and provide diversification.

Index-linked Negative Inflation is muted, and we expect these bonds to trade similarly to conventional government bonds.

Credit Neutral Yields are expensive in absolute terms, but spreads to the risk-free rate remain attractive. We favour high-quality, cash-generative corporate issuers.

Investment grade (corporate) Neutral Although all types of bonds are expensive relative to the past, investment grade credit offers a decent spread over government bonds.

High yield (corporate) Neutral Spreads have widened following the UK’s referendum and high yield bonds continue to offer attractive yields (around 6%).

Emerging market sovereign debt (in local currencies)

Negative Valuation is favourable on both a yield and currency basis. However, a volatile currency backdrop makes them risky, especially in the near term.

Foreign exchange

Sterling Neutral Both the International Monetary Fund and the Bank of England (BoE) have warned of a deteriorating economic outlook for the UK as a result of uncertainty following the ‘Brexit’ decision. BoE governor Mark Carney expects “some monetary policy easing will likely be required over the summer”, which should keep sterling around current levels for the foreseeable future.

US dollar Neutral In her biannual testimony to the US Congress in late June, Federal Reserve (Fed) Chair Janet Yellen no longer had the sense of urgency to raise rates that has marked much of the past year. She said the Fed needs to be sure US economic growth and hiring have rebounded – and there is no adverse shock from the outcome of the UK referendum – before any further tightening of policy.

Euro Neutral Expectations for further monetary stimulus from the European Central Bank are high as it attempts to preempt negative consequences resulting from ‘Brexit’. That should continue to pressure the single currency.

Yen Neutral Likely to continue to be weak against the US dollar and other major currencies over the medium to long term due to expansionary policies. Yet the yen has been rising due to recent increased demand for safe havens.

Real estate Negative Since the start of 2016 a combination of lofty valuations, a reduced pace of capital growth, stamp duty changes and ‘Brexit’ concerns have diminished the attractiveness of this asset class. We remain negative on the short-term outlook for the UK commercial property market.

Diversified commodities Positive Diversified commodities look attractively valued and price momentum has turned positive.

Gold Neutral Through the 2016 market paroxysms, gold has shone, increasing by 20% in January and February. Since then, it has bounced between $1,200 and $1,300 but now appears to be breaking out to the upside given the prospect of “lower rates for longer”.

Kleinwort Benson — Third quarter 2016 — 5This article was first published in May 2016.

Market Pulse — Equities

Key points

• Most equity fund managers adopt a regional approach, but it is important to consider the impact of sectors.

• There are many reasons to focus on sectors as they have driven the divergence between regions.

• With relatively few sector funds available, investors could hold stocks directly or consider specialist ETFs.

by Gene SalernoGlobal Equities

While the fund management industry remains structured around a regional approach, investing by global sector may present greater opportunities for investment selection. The relative performance of different sectors in the first quarter of this year stands in stark contrast to performances over 2015, highlighting the potential importance of sector allocations.

Global equity markets have provided plenty of surprises so far this year. The returns from different regions illustrate how Japan, the clear winner of 2015, is now the loser in 2016, so far. Meanwhile, the sectors that struggled in 2015 – emerging markets and developed Asia (excluding Japan) – are now leading.

A closer look at the numbers also shows how significant the gap between the winners and losers has been. The difference in performance between Japan and emerging markets last year was nearly 24%, suggesting plenty of scope for making good (and bad) investment decisions.

Mind your sector allocationsWhile many equity investors tend to focus on allocating capital according to geographic region, sectors have also shown stark differences and reversals in performance. Energy and utilities were two of the three worst sectors of 2015 yet were two of the three best over the first quarter of 2016.

Similarly, healthcare was the strongest sector in 2015 but the weakest over the first quarter (figure 2). Moreover, the difference in performance between energy and healthcare in 2015 was 28%, suggesting an even greater significance for sector allocation decisions.

There are many reasons for focusing on regions as opposed to sectors. While movements in foreign exchange rates tend to smooth out over the medium to longer term, larger shifts have recently driven some of the dispersion between regions. Meanwhile, sectors have probably played a more important role.

Consider the fact that the lacklustre performances from emerging markets, Pacific countries (excluding Japan) and even the UK in 2015, were in no small part due to those markets having higher concentrations in the energy and materials sectors.

Considering the role of sectors in portfolio performance

Sector funds are scarceSector-minded investors have fewer options at their disposal. According to Bloomberg, there are more than 1,140 equity funds with a specific focus on the UK market, yet just 390 focused on investing in the financials sector. Only 50 of those are designated as investing in financials globally.

Contrast this with the fact that the UK equity market represents less than 7% of global equities by market value, while financials represent nearly three times that at 20%. It seems the weight of the market’s attention is not well aligned with the weight of the market.

Is direct investment the answer?One option is to invest in stocks directly. You can build a portfolio according to the sector weights of your choice or – even better – according to a bottom-up approach that does not pay too much attention to a company’s particular domicile or broad sector classification.

Another option is to supplement regional allocations with sector-focused exchange-traded funds (ETFs) and other funds in order to tilt your allocations to your preference. Either way, it is well worth bearing in mind the importance of the role sectors play and the impact that they can have on driving your global equity portfolio’s performance.

Figure 2: Global equity total returns (%, US dollars)This chart shows sectors ranked by highest return over the first quarter of 2016. Healthcare has been the weakest so far this year after being last year’s strongest performer.

Source: Bloomberg and Kleinwort Benson. Data as at 31 March 2016.


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Market Pulse — Fixed Income

6 — Kleinwort Benson — Third quarter 2016 This article was first published in May 2016.

Source: Factset and Kleinwort Benson. Data as at May 2016.


Figure 3: Early signs of higher rates?We expect higher energy prices and wage growth to generate higher inflation and a steeper yield curve in the coming months.

by Mark AbleSenior Portfolio Manager

Note: As a view of the market in May 2016, we can see the impact of Brexit. However, our fixed income strategy has not changed.

Recent volatility pushed the ten-year gilt yield to an all-time low of 1.3%, and a real yield of just 1.0%. The prospect of an increase in inflation does not seem to be weighing on expectations of longer-term real rates. However, a 74% increase in the price of oil since February cannot be ignored. If the current supply/demand dynamic were to change, prices may rally further and the direction of travel for inflation would probably turn (figure 3).

Even so, the Bank of England’s (BoE) 2.0% inflation target is unlikely to come under pressure any time soon because inflation currently stands at just 0.5%. However, we expect higher energy prices and wage growth to generate higher inflation and a steeper yield curve in the coming months. Indeed, medium-dated bond yields have already risen by 30 basis points since the February lows.

Muted UK growthThat said, UK growth remains subdued – the economy expanded in the first quarter of 2016 at a modest annual rate of 2.1%. The data highlights the economy’s continued reliance on the service sector, which expanded by 0.6% during the quarter. However, construction fell by 0.9% and industrial output declined by 0.4%.

What will Brexit mean for UK interest rates and the bond markets? A vote to leave the European Union (EU) is expected to have a structural impact on sterling and interest rates. A vote to stay, on the other hand, would probably have little impact on interest rates. An environment of more certainty following the referendum could even prove to be positive for sterling.

A potential EU exit has been cited as providing a boon to economic activity from a weakening currency. Will this really make a difference? The UK is a net importer – exports account for only around 16% of GDP. Assuming there are no trade barriers, a structurally weaker pound should benefit from a dwindling manufacturing sector. On the flip side,

however, imports would become more expensive – leading to higher prices and a higher rate of inflation.

An exit is also likely to put the UK’s credit ratings under pressure as major rating agencies have hinted that the UK could be put on negative review. Markets will adjust rates to account for the uncertainty of independence. The BoE may have its hand forced to raise rates prematurely to halt the decline in sterling and the subsequent impact of higher inflation, putting the UK’s fragile recovery at risk.

What does this tell us?We expect market volatility to remain elevated, particularly ahead of the 23 June EU referendum. It does not change our view on interest rates, which we expect to rise but at a much slower pace than during previous tightening cycles. We continue to maintain a cautious approach to our fixed income investments with a short duration strategy.

In the short term, this approach has, on occasion, proven to be less favourable than having a longer, more volatile, duration strategy. Heightened volatility in the coming months will only further underpin our cautious approach and reinforce our focus on maintaining the real value of clients’ assets.

Key points

• We expect higher energy prices and wage growth to generate higher inflation and a steeper yield curve.

• The uncertainty surrounding Brexit is a risk but sterling could recover following the referendum.

• We continue to maintain a cautious approach to fixed income with a short duration strategy.

Has the 35-year bond bull market finally peaked?

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by Fahad KamalSenior Market Strategist

In June 2014 the Federal Reserve (Fed) announced the end of its quantitative easing (QE) programme. Following the news, the US dollar appreciated by 20% against sterling and a basket of currencies (figure 4). While the end of QE was the initial spark, momentum in the US dollar was sustained by “guidance” from the Fed. This meant that it would be the first major global central bank not only to end unconventional monetary stimulus, but also to tighten conventional monetary policy by raising rates.

In one of the most anticipated events in financial history, the Fed raised short-term rates in December 2015 for the first time in a decade. Ironically, this was also the moment when the trend in dollar strength came to a crashing halt. Much of this had to do with bad timing.

The Fed rate hike coincided with plummeting Chinese equities, which led to anxiety about the outlook for China’s economy. This set in motion a sell-off in commodities as China is a principal consumer. Lastly, falling commodities not only sunk the share prices of global companies directly impacted – such as miners and energy producers – but also pulled down unrelated companies, and wider equity indices with them. Brent crude traded near $26 per barrel in late January, its lowest price in over a decade. Global equities were down by more than 10% on a year-to-date basis in January, and dangerously close to entering bear market territory.

During this period of heightened volatility and deep investor anxiety, talks of a premature rise in rates raised the spectre of a “policy error” – and Fed Chair Janet Yellen blinked. She released a statement saying economic conditions

Market Pulse — Currencies

Key points

• The US dollar has fallen substantially this year owing to uncertainty about monetary policy and global growth.

• Sterling has held up surprisingly well although the EU membership referendum remains a key risk.

• Central bank policies remain the key driver of currencies movement, which should be supportive of the US dollar versus the yen and euro.

This article was first published in May 2016.

US dollars: back to the future?

Figure 4: The Fed and the US dollar The US dollar strengthened after the Fed ended its bond-buying programme but has weakened since the rate hike in December 2015.

Source: FactSet, Federal Reserve nominal narrow effective exchange rate index and Kleinwort Benson. Data as at May 2016.


in the US were “less supportive” for growth and, therefore, any continued tightening in policy. What followed was the sharpest fall in the US dollar in years. To the end of April, sterling appreciated by 5%, while the trade-weighted dollar weakened by 8%.

The theory of relativity Where the market goes from here is uncertain. A run of better US economic data – US consumer prices and industrial production recorded their biggest increase in years in April – has put Fed rate rises back on track for June, which is supportive of the US dollar. Indeed, Fed minutes released in late May show US policymakers are sanguine about the prospects for both US and global growth and inflation.

However, other factors will also play a role, particularly against sterling. The UK unemployment rate remained steady at 5.1% during the first quarter, with 74.2% of people aged from 16 to 64 working – the highest proportion since records began in 1971. But the “Brexit” referendum hangs over the UK’s future. Nonetheless, polls showed the “remain” camp was winning, which calmed some nerves. It fuelled confidence in sterling, which passed the $1.46 mark in late May

– one of the few currencies to appreciate against a rising US dollar. Yet we remain neutral on sterling against the US dollar for now.

As the Fed resumes tightening, markets may well revert to the “dollar strength” mantra of the past few years. It may not matter if the British economy resumes growth at par with the US following the referendum, keeping both currencies anchored around the $1.50 mark. However, the old paradigm should still apply for the yen and the euro where expectations of weakness persist given the loosening policies of their native central banks.

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by Fahad KamalSenior Market Strategist

At the Group of Seven (G7) summit in late May, Japan’s Prime Minister Shinzo Abe talked about the possibility of another economic calamity similar to the collapse of Lehman Brothers in 2008. While the statement was intended to encourage other leaders to act, it reflects the anxiety that has not completely disappeared since the financial crisis.

The latest bout of angst came early this year when global equities were dangerously close to entering bear market territory, before recovering. Oil prices swung more wildly – down about 25% at one stage – only to rally strongly and have risen by 35% from the beginning of the year to the end of May.

Throughout this year’s market volatility, gold has shone (figure 5). The price increased by almost 20% across January and February. Since then, it has

bounced between $1,200 and $1,300 an ounce, holding its value even as risk appetite re-emerged. However, with interest rate rises back on the agenda – at least in the US despite disappointing employment figures for May – the opportunity cost of holding gold looks set to rise.

Defence but far from a sure thing Many investors like to own gold for its defensive characteristics, which it has demonstrated in the past. In the ten worst quarters for the FTSE 100 since 1984 (the year the index began), gold retained its value nine out of ten times. In those ten quarters, equities fell by 15.4% on average whereas the average return for gold was 6.0%. In 2008, global equities lost 42% of their value, while gold increased by 6%.

Gold also rose through much of the 1970s, proving an excellent store of value through ultra-high inflation, oil embargoes and geopolitical conflicts. Indeed, in December 1979 when the Soviet Union

Gold is shining again

Market Pulse — Commodities

Figure 5: Golden oldiesThe price of gold rose substantially over the first few months of the year. Yet it is an asset with no yield and the opportunity cost looks set to rise as monetary policy begins to tighten.

Source: Factset and Kleinwort Benson. Month-end spot gold prices inflation adjusted to 2016 US dollars using US consumer prices index. Data as at May 2016.


Key points

• Gold has been one of this year’s strongest-performing assets and has delivered double-digit returns so far.

• It has demonstrated an ability to provide a safe haven against market turmoil but prices can be volatile.

• We have a small allocation to gold in multi-asset portfolios as part of our diversified exposure to commodities.


invaded Afghanistan, the gold price shot up to its highest in modern history – just above $2,000 an ounce in today’s terms.

Nevertheless, gold is not as “safe” as cash. While some investors hold gold as a hedge against the debasement of fiat currencies, remember that it is a commodity and can be very volatile. From 1980, the real price of gold fell drastically for two decades, offering little in the way of crisis protection or inflation hedging. At the start of the 21st century, real returns were an abysmal -33%, -49% and -81% over five-, ten- and 20-year periods, respectively, substantially underperforming money in the bank or even under a mattress.

Momentum has turned positive At Kleinwort Benson, we removed gold from multi-asset portfolios in 2013 after price momentum turned negative. In April this year, we initiated a small position in a diversified basket of commodities, largely on a more compelling valuation case and positive momentum. Gold represents just 11% of this basket, which we believe is enough for now.

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by Elliot WaltonInvestment Analyst

The UK’s European Union (EU) membership referendum on 23 June surprised financial markets with the “leave” vote beating “remain” by 51.9% to 48.1%. Before voting day, investors had been looking to the polls for guidance, with YouGov putting the “remain” side ahead with a 52% share. The bookies were even more confident with odds of 86% for “remain” and just 14% for “leave”.

The result left many people confused and had a substantial impact on sterling, which has touched its lowest level since 1985 after falling swiftly from $1.48 to $1.33 (figure 6). UK equity markets also fell in value (although the FTSE 100 suffered a greater fall at the start of February this year) but have since recovered.

UK property markets appear to be in flux and the impact of the referendum result remains unclear. Foxtons, one of the largest London-based estate agents, announced that it expects revenues to

fall due to the challenging conditions of Brexit. The company’s share price fell by 17% as a result.

Before the referendum, the UK Treasury warned that a decision to leave the EU could cause property prices to fall by as much as 18%. It is too early to tell, but data over the following weeks will give us a clearer idea of how property prices are being affected. One thing is certain: most investors do not like this amount of uncertainty.

In the commercial sector, many lettings and purchase agreements included clauses under which re-negotiations would take place in the event of Brexit. A report by the Institute of Directors (IoD) found that of the 1,000 business leaders polled, a fifth were looking to move some activities out of the UK following the referendum result, while a quarter were planning to freeze recruitment.

Any shift could affect demand for UK commercial property. Outflows from UK commercial property funds had already increased before the referendum and are reported to have risen significantly following the country’s decision to leave the union.

Market Pulse — Real estate

UK attractive to foreign investorsMeanwhile, following the pound’s fall in value, property is now trading at a 10% discount when measured in US dollars. Foreign investors with cash to spare may view this as the perfect time to invest. According to The Independent: “Estate agents have been swamped with calls from Chinese, Middle Eastern, Italian and Spanish buyers looking for a bargain.”

Properties in London’s prime locations are likely to attract the most attention. Estate agent Knight Frank points out that in the short to medium term, the fundamentals of demand and supply are unlikely to change. Savills, another upmarket agency, has raised some concerns about short-term prime market volatility, but the response from overseas investors so far appears positive. To attempt longer-term forecasting at this stage is unrealistic.

At Kleinwort Benson, our recent asset allocation decision to sell our holdings in UK direct commercial real estate has removed us from the uncertainty and risks attached to this asset class for the moment. If and when expected returns become compelling, we will consider returning to the asset class.

An uncertain time for UK property markets

Key points

• The UK’s decision to leave the EU is likely to create challenging conditions for UK property markets.

• Residential property is looking more attractive to foreign investors following the pound’s fall in value.

• We recently sold our holdings in UK real estate to remove exposure to the associated risks and uncertainty.

Kleinwort Benson — Third quarter 2016 — 9This article was first published in July 2016.

Figure 6: Fall from graceThe UK’s EU referendum result caught financial markets by surprise. One casualty was sterling, which plunged in value against the US dollar and other major currencies.

Source: Factset, Kleinwort Benson. Data as at 1 July 2016.


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Market Pulse — Markets at a glance

While most of the second quarter saw a renewal in global risk appetite – the S&P 500 tested all-time highs and the price of crude oil rose steadily – volatility spiked on 23 June as the UK voted on its membership of the European Union (EU). In the following week, most major equity indices returned into positive territory on a year-to-date basis as the mood improved. Yet many questions remain and the quarter ended with European 10-year government bond yields hitting record lows.

Meanwhile, before David Cameron stepped down as prime minister he said he would attempt to “steady the ship” over the coming weeks and months but that “fresh leadership” is needed. New Prime Minister, Theresa May, is expected to carry out negotiations with the EU. This process is likely to last at least two years and probably much longer.

An economic hit appears likelyMost economic forecasters believe that “Brexit” will lead to a short-term fall in GDP, and that a recession is possible. The International Monetary Fund (IMF) warned that the result could deliver a “negative and substantial” blow to the UK economy. It added that, although the fall in sterling “could act as a buffer” by boosting exports, the depreciation would not be enough on its own to offset the negative impacts on investment, consumption, employment and growth.

The IMF believes that leaving the EU could also hit British living standards and stoke inflation. Similarly, the Bank of England (BoE) warned of a deteriorating economic outlook for the UK – and potentially Europe – as a result of the associated uncertainty. Governor Mark Carney expects “some monetary policy easing will likely be required over the summer”, alluding to more interest rate cuts from the already record 0.5% low.

The UK shakes the global world order

Figure 8: Sterling against other major currenciesFollowng the UK’s EU membership referendum result, sterling fell sharply against the dollar, euro and yen.

Source: Bloomberg and Kleinwort Benson. Data as at 30 June 2016.

Figure 9: European 10-year government bond yields (%)A flight to safe-havens pushed sovereign debt yields down to record lows.


Figure 7: Investment returns (%)


Returns are in local currency unless stated and assume net dividends and interest payments reinvested.

10 — Kleinwort Benson — Third quarter 2016 This article was first published in July 2016.

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Developed market equities 1.4 -2.2 6.5 30.0 58.3 55.1

Emerging market equities 1.9 -7.5 0.1 15.8 25.0 18.1

Developed government bonds 2.7 8.4 12.3 17.4 19.1 27.1

Emerging market government bonds 3.4 9.7 15.1 22.8 29.4 44.5

Global investment grade corporate bonds 3.1 7.1 8.8 16.8 21.0 30.2

Global high yield corporate bonds 4.6 2.1 2.4 14.6 27.2 35.5

Oil (WTI spot price only) 26.1 -18.7 -54.1 -49.9 -43.1 -49.4

Gold 7.3 12.8 0.3 8.0 -17.2 -12.1

Agriculture (spot price only) 9.6 -4.9 -11.2 -19.3 -29.2 -32.4

Hedge funds 0.8 -5.9 -6.9 -1.9 3.4 -2.5

Global property 3.8 13.9 22.0 36.7 63.8 74.9

Listed private equity (in US dollars) -1.2 -6.6 -5.0 18.9 56.5 41.1

General risk informationThis publication is intended to give an insight into the thought processes that lie behind our investment views and our investment strategy. They do not necessarily reflect the current investment policy of Kleinwort Benson.

The information in this publication is provided for information purposes only and does not take into account the investment objective, the financial situation or the individual needs of any particular person. It is not an offer to buy or sell any particular security or investment.

This publication does not constitute advice. All potential investors should seek and obtain advice specific to their circumstances from a qualified financial adviser before making investment decisions. The value of investments, and the income from them, may fall as well as rise and the investor may not get back the amount initially invested. Past performance does not guarantee future performance. Fluctuations in exchange rates may cause the value of investments denominated in currencies other than sterling to fall or rise. The effects of charges and an investor’s personal tax circumstances may reduce any returns. Tax treatment depends on an investor’s individual circumstances and may be subject to change. Kleinwort Benson does not provide tax advice. Investors should seek and obtain tax advice specific to their circumstances from a qualified tax professional.

Regulatory informationThis publication is a financial promotion. It has been approved and issued in the United Kingdom by Kleinwort Benson Bank Limited. Kleinwort Benson is the brand name of Kleinwort Benson Bank Limited. Kleinwort Benson is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm reference number is 119269 and Kleinwort Benson is a member of the London Stock Exchange. Kleinwort Benson is a company incorporated in England and Wales with company number 2056420 and VAT number GB 629 2807 22. Registered Office 14 St. George Street London W1S 1FE. Telephone +44 (0) 20 3207 7000. Telephone calls may be recorded.

Kleinwort Benson is the brand name of Kleinwort Benson (Channel Islands) Investment Management Limited which is a company incorporated in Guernsey with company number 59377. Registered Office Dorey Court Admiral Park St Peter Port Guernsey GY1 2HT. It is regulated by the Guernsey Financial Services Commission for the conduct of investment business. Telephone calls may be recorded.

Kleinwort Benson is the brand name for Kleinwort Benson (Channel Islands) Limited which is a company incorporated in Guernsey with company number 52103. It is regulated by the Guernsey Financial Services Commission for Banking and Investment Services. Kleinwort Benson is also authorised and regulated by the United Kingdom (‘UK’) Financial Conduct Authority (‘FCA’) in respect of UK regulated mortgage business and its FCA firm reference number is 310344; registered office, Dorey Court, Admiral Park, St Peter Port, Guernsey GY1 2HT. Telephone number +44 (0)1481 727111. Telephone calls may be recorded.

Please note Guernsey is not part of the UK and when you conduct business with Kleinwort Benson outside the UK you will not be eligible for: (a) the protections provided under the UK’s Financial Services and Markets Act 2000 other than protections relating specifically to UK regulated mortgage business; or (b) referring complaints to the UK’s Financial Ombudsman Service. However Kleinwort Benson’s UK regulated mortgage business is covered under the UK’s Financial Services Compensation Scheme (‘FSCS’). You may be entitled to compensation from the FSCS if Kleinwort Benson cannot meet its obligations in relation to UK regulated mortgage business. This depends on the circumstances of the claim. Further information about the FSCS is available on the FSCS website www.fscs.org.uk or on request from FSCS, 10th Floor, Beaufort House, 15 Botolph Street, London EC3A 7QU. Telephone 020 7741 4100 or Freephone 0800 678 1100.

Kleinwort Benson places all client deposits with a spread of approved counterparties and other parts of the Kleinwort Benson Group (the ‘Group’). As such their financial standing is linked to that of the Group. Depositors should form their own view of the financial standing of Kleinwort Benson and the Group based upon publicly available information.

Kleinwort Benson is a participant in the Guernsey Banking Deposit Compensation Scheme (the ‘Scheme’). The Scheme offers protection for ‘qualifying deposits’ up to £50,000.00 subject to certain limitations. The maximum total amount of compensation is capped at £100,000,000.00 in any 5 year period. Full details are available on the Scheme’s website www.dcs.gg or on request. Please note deposits with Kleinwort Benson outside the UK are not covered by the UK FSCS.


Market Pulse

UK+44 (0)20 3207 [email protected]

Guernsey+44 (0)1481 727 [email protected]

For details of our services and general information about Kleinwort Benson please visit www.kleinwortbenson.com

market pulse - société générale · kleinwort benson — third quarter 2016 — 3 for government...

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