The purchasing managers’ index and the consumer confidence index both fell significantly from June to July, while the Bank of England has reduced its GDP forecasts for 2017 and 2018 by 1.5 and 0.5 percentage points to 0.8% and 1.8%, respectively.
In addition, inflation expectations have been raised as the upward push from the weakening of sterling – and increase in import costs – is deemed likely to have a greater impact than the downward pressure from slower economic growth.
The BoE has responded to this with a base rate cut to 0.25% and the announcement of further asset purchases. Despite this, there are expectations of further support for the economy being required, including fiscal policy measures from the UK government.
The long-term nature of the EU exit process suggests uncertainty will be with us for some time, and with this in mind it is understandable that we have not seen wholesale changes made to the UK funds we cover.
How have managers reacted? There has been limited trading from the majority of UK managers, with few buying new positions and the majority simply topping and tailing positions based on price moves.
Market efficiency
This reflects the efficient nature of the market in pricing new information but also highlights the fact most managers are waiting for guidance from company management regarding the outlook for their businesses.
As a result, managers are sticking to the companies they understand well and those where they have confidence in the long-term success of their business strategies, despite the potential for Brexit to push this success further into the future.
Going into the Brexit vote most managers had portfolios with a domestic, FTSE 250 bias, as they generally did not feel an exit vote was likely and preferred to hold stocks that reflected their own investment processes and long-term views.
Combine this with a general under-weight position to commodities by active managers and it is clear why they have underperformed passive approaches during 2016. However, over recent years this positioning has usually been beneficial and has contributed to the good relative returns from active managers.
Click through to the next to page to see which funds to watch…
