23 October 2016

In the aftershock of the UK’s surprise vote to leave the European Union, the world has witnessed the historical rollercoaster that has befallen the political and economic environment and furthermore, the morale in the European Union and the United Kingdom. There has been much speculation as to what this post Brexit EU will look like and what this new relationship between the EU and the UK will mean for investors. However, what has become clear is that Brexit, though rife with uncertainty, has opened up opportunities for investors when looking at fixed income.

For investors, though this may appear to be a difficult time when deciding on where to invest next - low interest rates face the bond market which has caused the price of the bonds to rise and we are seeing lower yields. Though this means investors seeking higher returns will be faced with no other option than to look at maturing bonds, there are still a variety of different and exciting products that offer attractive uncorrelated returns. Furthermore, fixed income bonds, though come with their own risks, have long been seen as uncorrelated and less risky when compared to equities and offer a fixed rate of return over a set period. They also provide portfolio diversification - a steady stream of income that acts as a cushion against the ups and downs of the stock market.

The market environment since June 23rd has been unpredictable and uncertainty has seeped in. As a result, the interest earned on UK government bonds has collapsed which poses problems for pensions as annuity rates are slashed with final salary scheme deficits widening. The yield/interest rate, on money invested in the 10-year UK government bonds has dropped from 1.37 percent, just before the EU referendum result, to 0.87 percent today and it is only expected to drop further -  to anywhere between 0.57 - 0.67 before the end of Q4.

The investment landscape since the Brexit vote three months ago has created a fragile market with uncertain times ahead. However, it has highlighted interesting questions around how to make money over projected long periods of volatility and fixed income is generally considered to be a less risky investment than stocks. Given the diversity of the market there is breadth of innovative products to explore that will suit every investor in accordance with their needs.

Any opinions expressed here are the author’s own.