Bill Jamieson: Don’t panic over Brexit in summer of discontent

Stock markets have rallied from the Big Dipper plunge. Picture: Contributed

Stock markets have rallied from the Big Dipper plunge. Picture: Contributed

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Stock markets may have rallied from the Big Dipper plunge in the early weeks of the year, but investors suffered a major fright and the rally came too late for the annual rush of ‘ISA season’ sales.

Between 1 March and 5 April – the peak period for people to take advantage of their annual Individual Savings Account allowance – net ISA fund sales slumped to a ­paltry £237 million. That’s less than half the £563m recorded over the same ­period last year and reckoned to be the lowest level since the turn of the millennium. The 2015-16 tax year recorded net fund ISA sales of £1.5 billion, down from £2.6bn the previous year.

Investors particularly shunned funds investing in shares – these suffered net outflows of £459m – and opted instead for more conservative investments, like bond, cash and mixed asset funds. How ironic that the collapse in ISA sales followed a big rise in the annual allowance: in 2014 Chancellor George Osborne raised it from £11,520 to £15,240.

Several other factors in addition to scary market volatility may help explain the slump. Laith Khalaf, senior analyst at ­Hargreaves Lansdown, said investors could be prioritising their pensions due to greater freedoms and higher rate tax relief looking under threat.

He said: “Pension sales appear to have held up quite well so far this year, which might suggest investors have prioritised their Sipps over their ISAs.

“Perhaps this is down to pension freedoms making pension saving look more attractive, or it could be higher rate taxpayers making hay while the sun is shining, in the expectation that sooner or later their tax relief might get cut.”

The continuing rise in the ISA allowance, which will jump to £20,000 next year, may also have reduced the need to rush to use up the limit before the end of the tax year.

Add to this a rush by buy-to-let landlords to bring forward property purchases ahead of the latest stamp duty hike, and the continuing slow growth in household incomes and it is not hard to see why ISA investment, for all its tax efficiency charms, lost its lustre this year.

That old stock market adage ‘Sell in May and go away, don’t come back till St Leger Day’ (the horse race in mid-September) seems to have ­particular potency this year with uncertainty over the referendum on our EU membership on 23 June.

In any event, many investors have long been wary of investing in the summer months, avoiding a period when there is an activity lull and markets are expected to outperform. As Citywire reports, the ‘sell in May’ lore has an element of truth. Adrian Lowcock, head of investing at AXA Self Investor, analysed the performance of the FTSE 100 since 1986. Over the last 29 years it has ended the summer months lower in 15 of those years.

Jason Hollands, managing director of Tilney Bestinvest, reminds us that these years also featured heavy ­summer sell-offs: the Black Wednesday crash of 1992, the 1998 commodity crisis, the bursting of the tech bubble in 2001 and 2002, the 2008 financial crisis and the 2011 eurozone debt crisis. All these sell-offs led to double-digit declines in the FTSE All-Share over the summer months.

Counting just the performance between the beginning of May and the end of September between 1986 and 2014, the FTSE 100 is down 16.5 per cent excluding dividends.

However, include dividends and the picture changes. Lowcock finds that over the same period, the FTSE 100’s 16.5 per cent loss is turned into a 32.4 per cent gain, with the index losing value in 38 per cent of summers over the period, rather than just over half.

Hollands counsels investors not to be alarmed about a Brexit referendum outcome. Sterling has already fallen and shares in companies likely be worst affected by Brexit uncertainty have also moved downwards.

He said: “The question investors should ask themselves is whether this weakness presents a buying opportunity or a reason to stay out of the market. While some UK-listed businesses may be particularly exposed to uncertainties around future UK trade arrangements with the EU, the overall UK stock market is an international market dominated by large multinational firms and not a direct proxy for the UK economy.”

Those brave investors who ignored the Big Dipper and took out ISAs in February and March should already be showing a ­profit. On a long-term view with dividend income accruing, they should not be panicked into short term decisions based on poll readings.

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