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Market Update

May 2016 Update

Brexit uncertainty leads to modest gains in the stock market

The UK stock market delivered a modest return of 0.7% in May. Uncertainty regarding the referendum on the UK’s membership of the European Union (EU) appeared to limit gains, with the UK market trailing its global peers. The Bank of England lowered its GDP (gross domestic product) forecasts amid the “highest uncertainty since the euro crisis” and warned of lower growth, higher inflation and lower sterling exchange rates should the UK vote to leave the EU.

The pattern of trading was the reverse of the previous month. Shares in energy and commodity companies had risen strongly in April as oil and metals prices rebounded, but they led the fallers in May. There were further concerns about the strength of the Chinese economy, as China provides much of the demand for commodities and raw materials. Oil stocks recovered slightly towards the end of the month as crude oil prices touched $50 for the first time since November.

Financial stocks, led by banks, were among the best performers. The prospect of rising interest rates in the US helped, as this supports the ability of banks to make profits. This is because banks charge more interest to borrowers than they pay to depositors. As rates rise, the difference between the borrowing and lending rates increases.

In the US, the release of minutes from the preceding meeting of the Federal Reserve (the Fed) showed that there was the possibility of another increase to interest rates in June. The news caught investors a little by surprise, with the meeting notes stating that such a move would be “appropriate” if unemployment levels, economic data and inflation continue to show signs of improvement. However, the Fed is wary of choking off the recovery in economic growth and the likelihood of a June increase subsequently receded.

Speculation about changes to US interest rates also affected bond markets in the US. Prices fell slightly and yields rose. In the UK, however, prices rose and yields fell. This was because of the uncertainty caused by the upcoming EU membership referendum. Apart from cash, government bonds are viewed as one of the least risky investments.

The rise in the prices of corporate bonds exceeded those of government bonds. The performance of corporate bond markets often bears a closer relationship to equity markets than it does to the performance of government bonds. This is because investors react to the factors affecting the company that issued the bond, just as they would when investing in equities.

During May, bonds issued by companies in the financial sector performed particularly well, reflecting the pattern within equity markets. This was partly due to a rebound in prices following previous weakness, but also because investors had started to anticipate interest rate rises.

UK commercial property recovered from the previous month’s loss, with capital values rising slightly. But the underlying trend still shows a slowing market. The collapse of BHS was followed in May by further bad news from UK retailers. Marks & Spencer warned that a plan to revamp its clothing range would adversely affect profit. Meanwhile, Burberry announced a 10% drop in full-year profits, which it blamed on fewer Chinese tourists buying at its European and Hong Kong stores.

Should I make any changes to my investments?

Everyone’s circumstances are different and we aren’t able to give you advice on what is appropriate for you. As always, if you are considering your own position, you should remember why you invested in the first place and consider the lifespan of your investments. Most importantly, you should seek financial advice before making any changes to your investments.

One way in which you can help reduce the impact of any market volatility is to spread your investments across different asset classes and regions. For more information about investing across different asset classes, take a look at our An introduction to diversification in multi-asset funds guide.

Remember that before making any changes to your investments, you should seek financial advice. If you don’t have a financial adviser, you can find one local to you by visiting find a financial adviser, which is responsible for promoting financial advice in the UK.

All figures quoted are in sterling terms to 31 May 2016 unless otherwise stated.

The information contained in this article has been derived from sources which we consider to be reasonable and appropriate. It may also include our views and expectations, which cannot be taken as fact.

Investment markets and conditions can change rapidly and, as such, the views expressed in this update should not be taken as statements of fact nor be relied on when making investment decisions. Forecasts are opinions only, can not be guaranteed and should not be relied on when making investment decisions.

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