The historic EU referendum decision caused turmoil on financial markets in the days that followed. One week on, stockmarkets may have recovered but a number of factors have changed that will affect UK investors’ wealth.
The recovery in stockmarkets is due in part to the prospect of central banks pumping more money into the economy.
That hope has not just pushed up share prices but also increased demand for government bonds. As the price of bonds rise, the yields fall. It is these yields that reflect the cost of borrowing for governments but also affect borrowing costs throughout the economy.
First, we look at how those yields may affect savings, mortgages and pensions, and then examine other ways your finances are affected.
1. Savings rates
It is possible savings rates may fall further across Europe, partly because of the fresh prospect of cuts in central bank rates but also because of bond yields drifting lower. As explained above, falling yields are normally reflected in lower rates in the rest of the economy.
In the UK, the Bank of England may now cut rates – whereas, before the Brexit vote, the speculation was about when rates might rise.
In an update on 1 July, Schroders Chief Economist Keith Wade said he expects the Bank’s Monetary Policy Committee to order a cut in the UK bank rate in August, and for the European Central Bank to cut again.
Schroders Chief Economist Keith Wade said he expects the Bank’s Monetary Policy Committee to order a cut in the UK bank rate in August
The issues around savings rates are complicated. The interest rates on deposits have steadily declined in recent years even though the bank rate has been fixed at 0.5% since March 2009.
Bank of England data shows that in the past five years, the average rate on a two-year fixed savings bond has fallen from 3.49% to 1.15%. It is in part due to the efforts deployed by the Bank to tackle the financial crisis.
Its programme of quantitative easing, started in 2009, and Funding for Lending Scheme, started in 2012, achieved the aim of driving down borrowing costs in the economy. Lower borrowing rates meant banks and building societies, which must balance the two factors, offered lower savings rates.
With the Bank of England pledging further support for the economy if it is needed, consumer rates may fall further. The rates at which banks lend to one another can give an early indication of this. It is known as a “swap rate”, and it is particularly influential on fixed deals for savings and mortgages.
The two-year swap rate on 30 June was 0.57% compared to 0.84% before the Brexit verdict was announced.
As ever, nothing is certain in financial markets and it is possible that if investors grow concerned about the power of central banks to support the economy or if they become more sceptical about the ability of governments to meet debt repayments, bond yields could rise and consumer rates could follow.
2. Mortgage rates
For all the same reasons savings rates may fall, as explained above, the rates on new mortgages could be cut further, perhaps as a result of movements in the money markets or because of a reduction in the UK bank rate. The latter could also lead to a fall in rates on existing mortgages, such as standard variable rates.
In the UK, mortgages rates, as with savings, have been falling for years even without a change in the official bank rate. Bank of England data shows the average fixed rate has gone from 4.39% five years ago to 2.52% today.
The same caveat applies here, as with savings: if confidence in governments wanes, rates could rise.
There is something additional to consider on mortgage rates. Some commentators have suggested banks may not pass on reductions in the bank rate in full. It is worth considering the example of Switzerland.
The Swiss central bank took rates negative in early 2015. Mortgage rates fell initially, but then rose, according to comparison website Comparis. One possible theory is that because deposits become a cost, the cost is passed on through higher lending rates.
Swiss mortgage rates, however, have fallen again this year. The pricing of rates on products is complicated and nothing is certain. Consumers should consider taking specialist advice.
Anyone who had been planning on taking money from a pension may consider discussing with their financial adviser whether it would be more prudent to wait until a period of calm.
While stockmarkets have largely recovered, they are likely to remain volatile. Most commonly, pension portfolios are moved away from shares to bonds or cash ahead of the date at which you may want to draw the money in a process known as “lifestyling”, which may offer protection from stockmarket volatility.
Secondly, those considering buying an annuity, which pays a regular pension income for life in exchange for a lump sum payment, should also seek further advice with annuity pricing likely to be volatile.
The pricing of annuities is influenced by the yield on gilts, which have steadily fallen since the financial crisis of 2008. The uncertainty caused by last Thursday’s (23 June, 2016) decision spurred the buying of gilts, pushing up prices and pushing down yields. The 15 -year gilt fell from 1.93% to 1.64% on the day and had slid further, to 1.48%, by Thursday afternoon (30 June)..
Data firm Moneyfacts said the average level annuity without guarantee for a £50,000 purchase was £2,627 for a 65-year-old man just before the Brexit announcement but had fallen to £2,419 a week later.
The value of the pound has fallen most heavily against the dollar, from a high of $1.48 on 23 June to a low of $1.31 on 27 June. By Thursday afternoon (30 June), it was at €1.34, an 8.5% decline from its pre-Brexit level.
The fall was matched against the euro, sterling fell from €1.32 to below €1.21 over a week, an 8.4% decline.
The impact for those changing money for holidays will be painfully apparent, and it applies to many other currencies: the pound has fallen 9% against Turkish lire since the Brexit result, 7.7% against the Australian dollar and more than 10% against the South African rand.
However, the swings will greatly benefit anyone transferring money back into sterling from these countries, for example, those moving proceeds from a property sale.
The impact on stockmarket wealth has been minimal, at least for British investors holding UK stock market investments; foreign investors in UK investments may have been affected by the slump in the pound.
Investors who resisted the urge to panic sell as the decision was announced have been rewarded, as have those brave enough to buy during the lows. The UK’s largest broker, Hargreaves Lansdown, reported a rush of activity by individual investors last Friday with buying far outweighing selling.
The FTSE 100 fell from 6338 at the close on Thursday 23 June to a low of 5805.8 the following morning before surging back to a high of 6397 by mid-morning 30 June, a 10.3% gain.
Outside the UK, the stockmarket recoveries were less powerful. The Eurostoxx 50, an index of continental Europe’s 50 largest companies, closed last night 6.4% below its pre-Brexit close while America’s S&P 500 was 0.8% lower.
The UK’s outperformance could be based on a greater anticipation of central bank action but it may also reflect the globalised nature of British blue chip companies, many of which will have foreign revenues boosted by a weaker pound. The more domestically focused FTSE 250 today closed 6.5% below its level of 23 June.
Demand for gold, perceived as a safe haven during times of turbulence, has improved. The spot price of gold bullion has risen more than 5% in the past week to $1,319.
The varied performance of assets underlines the merits of diversifying portfolios, spreading your money around so that some of your assets rise when others fall.
Data collated by Schroders last week, which showed the long-term returns that followed the worst days for the stock market over a quarter of a century, is also worth considering.
6. The cost of living
It remains too early to fully understand how the Brexit decision will affect the cost of imported goods years from now as so much depends on trade agreements reached between UK and the EU, and other countries.
In the short-term, a falling pound could import inflationary pressures. The most immediate example could be the price of petrol.
Fuel is priced in dollars, so when the pound loses ground against the US currency, petrol retailers raise prices at the pump, depending also on what is happening to the underlying cost of petrol.
Oil prices fell after the referendum result but the AA, the motoring group, has predicted petrol prices could rise by a few pence per litre due to currency swings.
The Office for National Statistics said the average price of unleaded petrol was 111.4p a litre on 27 June, up 0.2p on a week earlier.
If the pound’s weakness persists, the cost of other imported goods may also rise.
A version of this article was first published on the Schroders website on 1st July 2016.