Despite the initial turmoil caused by the UK’s Brexit vote, the value of UK individuals’ savings and investments will not decrease significantly in the long term, our revised forecasts show. Western Europe faces slightly bigger challenges.
The growth in UK retail investors’ assets in recent years has been driven primarily by the strong performance of mutual funds. When these recorded losses in 2015, the yearly growth rate of aggregate liquid assets fell just below 3%, the lowest level since the 2011 sovereign debt crisis. Initial reactions to the UK Brexit referendum – revised GDP forecasts, a sharp fall on the stock market, suspended redemptions from property funds – indicated that 2016 could turn out to be even worse. Yet six weeks after the vote, our forecasting models suggest a different story.
The second half of 2016 will indeed be difficult for managers of UK unit trusts, which have already suffered significant outflows. Bad publicity around real estate funds has only added to the general perception of uncertainty, and unsophisticated retail investors are likely to stay away from mutual funds for a while. However, the lower value of fund holdings is likely to be offset by other asset classes. For instance, the strong rebound of the stock market (driven by hopes of higher profits for exporters benefiting from the weaker pound) will fuel demand for direct equity investments.
The outlook for deposit holdings is particularly interesting. In the short term, savings account balances are set to increase despite the Bank of England’s (BoE’s) decision to cut the interest rate to the lowest ever level at 0.25%. This is because investors (particularly those reluctant to take their chances with equities now) will turn to safe havens. But if the low interest rates persist, savers will eventually start to look for alternatives and return to riskier asset classes. If on the other hand inflation eventually forces the BoE to hike rates, this will only be good news for holders of deposits and bonds.
Taking all these factors into account, although we have reduced our 2016 and 2017 growth forecasts for UK savings and investments, our predictions for the following years are optimistic. In fact, following the post-Brexit referendum revision, our forecast 2016–20 compound annual growth rate (CAGR) for the UK wealth market increased from 3.96% to 4.08%. This could all change, however, depending on if and when the UK triggers article 50 and the process of Brexit actually begins.
As an aside, the future is not quite as bright for Western Europe. There the expansion of the wealth markets is driven by GDP growth. Thus lower forecasts for the economies of Germany and France, the two strongest EU members, mean the 2016 growth rate of liquid assets in these markets will fall below 1%. The UK’s decision may be the first step towards the disintegration of the EU, but for now we estimate that following a period of uncertainty, Western European markets will eventually recover and rebound.
All the current forecasts are available in our Global Wealth Markets Analytics,Global Retail Investments Analytics, and UK Retail Savings and Investments Analytics products. We will continue to follow developments around the UK’s vote to leave the EU and update our models if necessary.
By Bartosz Golba, Interim Head of Wealth Management