13th January 2016
Fall in commodities, a windfall for UK consumers
“The lacklustre performance of the wider UK stock market in 2015 was largely attributable to the collapse in mining and oil stocks – a direct effect of the fall in commodity prices. However, while this was bad news for commodity producers, it was a windfall for consumer pockets, as petrol prices have fallen significantly. The economic background is generally still very supportive for the UK consumer. Incomes continued to recover: the combination of price falls in food and fuel, and some wage growth, saw household disposable income rise consistently throughout 2015, and I expect this consumer strength to continue to support growth this year.
The outlook is less positive for the industrial sectors, particularly those companies directly exposed to Chinese demand and commodity prices. However, there are pockets of resilience in the form of companies where earnings streams are more consistent, for example, where they have ongoing maintenance contracts with customers.”
Impact from a potential British withdrawal from the European Union (‘Brexit’)
“If Britain withdraws from the European Union (EU), but follows Norway and remains within the European Economic Area (EEA), the free trade area and the Single Market (no trade barriers), there won’t be any real change to the way the economy works and interacts with the EU. Changes may take place longer-term as the UK no longer adopts new legislation, but the effects of this cannot yet be determined. It is possible that the large current account deficit (the amount by which the value of imports of goods/services is greater than the value of exports) of the UK will be seen by the markets as unsustainable after an EU exit, resulting in a fall in our currency and a forced rise in interest rates (as investors will demand higher returns on money lent to the UK). This may indeed happen if there is a ‘Brexit’, but this fundamental weakness of the UK economy could become a problem at any time, even if the UK remained a full member of the EU.”
UK equity market outlook still looks positive
I expect returns over the coming year to be relatively strong. If the commodity price collapse has run its course, which I think is very probable, equity market returns could head back towards the historical norm of just under 10%, perhaps even more since we have had two disappointing years in a row. The outlook for the market is further supported by a generally good increase in company profitability, notwithstanding commodity-related sectors.
In addition, income from dividends remains higher than income from bonds, and dividend growth will be key for investors who want to achieve real returns over the coming years. In the environment of low interest rates and volatile market conditions, the income-generating and defensive characteristics of equity income funds should continue to attract and reward investors going forward.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Michael's views are his own and do not constitute financial advice.
Sign up to receive our free weekly newsletter.