The run-up to the EU referendum on 23 June featured some pretty extreme claims and predictions from both sides – and indeed from a variety of people watching on the side-lines. And yet, if anyone suggested at the time the UK market would rise some 15% in the three months following a vote in favour of Brexit – as the following chart shows – then, here on The Value Perspective, it must have passed us by.
Market performance since Brexit vote
Source: FE Analytics, to 4 October 2016
More prevalent in the eventuality of an ‘Out’ vote, of course, were considerably gloomier outlooks that culminated in some very pessimistic analyst notes being published on 24 June – for example, Goldman Sachs expecting “UK domestic equities and the FTSE 250 to be most hit” and Citi stoically seeing downside risk limited to “10% to 20%” from the closing level on 23 June.
And maybe, over the coming weeks and months, those views will still be proved broadly correct – who knows? Which of course is completely our point. As we have said many times before, the future is uncertain and thus unpredictable and the EU referendum illustrated this not once but twice as consensus failed to call correctly either the result of the referendum or that markets would react by climbing 15% or so.
The confidence with which we expressed our view that, on matters such as forecasting election results, we should have no view had twin foundations – our well-documented suspicion of forecasts and those who earn a living from making them and our even more frequently expressed faith in value investing and its long-run ability, among other things, to turn bad headlines into good investments.
And if that paragraph looks familiar, it is because it is copied wholesale from Poll position. That was a piece that ran on The Value Perspective ahead of the EU referendum, which itself repeated some thoughts offered in two pieces written a little before and a little after the General Election in 2015. In the first, Polls apart, we asserted: “You might as well ignore anything any pundit has to say on the outcome.”
And in the second, Poll fault, we said: “We may have got our pre-election anti-forecast right but that does not mean we will be getting cocky. We are well aware that, just as we ourselves did not know how the election would turn out last week, we cannot know what will happen next week.” It is why we do not involve ourselves with economics and refrain from shifting portfolios around ahead of big macroeconomic events.
So at the very least we are consistent – albeit perhaps prone to repetition (and certainly running short on ‘Poll’ puns). As a postscript then, we will offer one new observation, which springs from Chancellor Phillip Hammond’s announcement at the recent Conservative Party Conference that the Theresa May-led administration will no longer be seeking to wipe out the UK’s deficit by the end of this Parliament.
Clearly this significant change in fiscal approach has been driven by political considerations rather than anything else, which hardly inspires confidence. As such, has the time now come to hand responsibility not just for the setting of monetary policy to the Bank of England but also fiscal strategy – thereby leaving the politicians clear to worry about how to generate, and spend, the country’s money within a set framework?
It is only a question – very much not a prediction – and with that we will return to the more familiar territory of building portfolios on a long-term view in accordance with the set framework that is a value investing strategy.