Caroline Simmons, deputy head of investment office UK at UBS Wealth Management, said that the market reaction following the vote to leave was as to be expected and the moves so far have been logical.
The bank expects to see the FTSE fall by around 10 percent over a period of 12 months. The areas of the market selling off the most are the ones which are linked to the UK economy like consumer financial, consumer discretionary. The areas which are holding up a bit better are the defensive sectors and health care or areas with exposure to the US, as they will benefit from the weaker pound.
“You will continue to get intraday swings. In theory the UK baskets will underperform following the vote to leave while US baskets will outperform,” Ms Simmons said.
The firm’s UK basket is underperforming by about nine percent on average and its US basket is outperforming by about two percent.
Volatility will prevail until there is more certainty about things, Ms Simmons said. “It will depend on what the economic growth picture looks like in terms of what the central banks are doing and what the implications for Europe are - then you become a bit longer term again.”
“PMI numbers are only released once a month so you then become focused on them to see how things are evolving, and is the drag on GDP evolving along the lines of what people thought it might.”
“Nothing has changed the way we are set up as a country at the moment and it won’t for at least two years. But you can’t keep delaying things; you do need to generate cash flows so maybe focus goes to regions which are out of the European area. At the end of the day people need to operate - you can’t just be on hold continuously.”
In order to generate cash flow it will depend on companies' abilities to manage the cost base in line with whatever is going on with the top line which is driven by the GDP outlook, Ms Simmons said.
In terms of the effect on house prices, the biggest driver is credit conditions which are dependent on the base rate and what the ability and the desire is of the banks to continue to lend mortgages and at what level and rate, she said.
“If the base rate were to decrease, the discussion will turn to what happens to mortgage spread. Does the mortgage rate move down with the base rate or not and when does it do it? There are quite a lot of fixed rate mortgages in the UK so maybe it won’t happen for a while.”
The willingness of the banks to lend will be determined by what their capital situation is and what else they need to use the capital for and whether they want to be expanding the size of their balance sheets at this time or not.
House prices are going to be determined by the mortgage rates and the demand for housing. Employment status and availability ofcredit are also drivers, she said.
“London is probably more exposed in that London house prices are generally more volatile than houses elsewhere in the UK. Our forecast at the beginning of the year for house prices on average was six percent which is already a slow down from the 10 percent we have seen in recent years. It looks harder to reach that forecast if you’re having slower GDP, uncertainty about the mortgage rates and general hesitance from people.”
Ms Simmons said it will be interesting to see how international investors for Prime Central London view the economic and political future of the UK versus the fact that buying a property in the UK may have just got 10 percent cheaper, so we may find out which is the bigger driving factor: the currency or the stability of the UK.