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Heartwood Investment Team

What are our expectations for UK financial markets?

A higher risk premium across UK financial markets is likely to persist in the interim to June 23rd, with sterling most likely to be the lightning rod. We have already observed the UK currency’s meaningful depreciation since David Cameron announced the new settlement with the EU, having fallen 6% on a trade-weighted basis since the start of the year. UK equities and gilts have remained fairly resilient so far, swayed more by global considerations: the US interest rate cycle, China and commodity prices. Nonetheless, Brexit headlines between now and June have the potential to create toxic vapour that are unlikely to be helpful to UK financial markets.

And what happens after 23rd June? 

It is obviously difficult to predict the electoral outcome, but also since there is no precedent we should be wary of making sweeping statements about the potential financial market implications. The referendum in 1975 perhaps draws more political rather than investment or economic comparisons, in light of developments in the global economy over the past two decades.

We assume that a vote to stay in the EU would be seen by investors as largely business as usual and greeted with relief, much in the same way as the post-relief rally following the Scottish referendum result in 2014. There could, however, be questions about a second referendum if the result is far from decisive, which could add to market uncertainty in the longer term.

Broadly, though, the proposed agreement with the EU does not appear to change the economic framework to any great extent, nor does it appear likely to significantly impact the inward flow of European labour, which has helped to keep UK wage growth relatively modest, to the benefit of the corporate sector. Overall, therefore, a vote to remain within the EU on renegotiated terms would be taken as a net positive by the markets, especially in light of the UK’s current account deficit of 4.2% of GDP and the UK’s high dependence on foreign capital flows to fund it.

We expect some of the risk premium being built into UK assets, particularly sterling, to unwind. The UK gilt market may sell off moderately, particularly if there has been a risk off trade in advance of the decision, but longer-term economic fundamental dynamics will continue to drive bond yields, which should be ultimately positive for gilts, and in particular there would be no clouds overhanging the UK’s sovereign credit rating. The UK economy is performing adequately, and the recent weakness in sterling will go some way to improving the terms of trade, which clearly deteriorated in recent months as sterling, on a trade weighted basis, appreciated. Investors will also, as ever, prefer the certainty of the new regime over the current uncertainty, which, all other things being equal, should help the bid for sterling assets, including gilts and equities. Finally, UK property assets should also enjoy continued support from overseas investment flows.

What if the UK votes to leave the EU?

The consequences of leaving are of course more uncertain, both in terms of the mechanism of leaving (which has not been tested) and the length of time to achieve it; although two years is timetabled, it is open to question as to whether this is achievable. The negotiations could be messy and protracted, and the EU will want to maintain a firm hand to avoid encouraging other potential exit candidates. Furthermore, we would expect UK economic growth to contract if external demand for services weakens and confidence is undermined, resulting in slower consumption that might hurt growth, employment and wages.


The price action of sterling is largely driven by monetary policy and capital flows and on this basis we would expect the UK currency to stay weak on concerns about Bank of England deferring interest rate hikes, concerns of capital flight and uncertainty on the credit rating outlook. As these concerns are assuaged and depending on the level of sterling reached, we would have a more optimistic cyclical view of the currency over the longer term, as ultimately we see no significant lasting damage to the UK economy.

UK Fixed Income

In theory, an ‘Out’ result would be negative for the UK gilt market since there will be questions around the UK’s ability to maintain its AAA sovereign credit rating (although ultimately we do not believe this to be a significant factor) and the threat of capital flight, given the UK’s rather sizeable current account deficit which needs to attract foreign buyers.

However, in reality, there will probably be few places to hide among UK assets, and gilts may offer the safe haven, risk-off trade, particularly if Bank of England interest rate hike expectations are pushed back as a result. The gilt market is a predominantly domestic-owned market, notwithstanding that foreign ownership currently stands at an all-time high. We expect the Bank of England to counter the negative effects of any potential international selling of gilts as it has the capacity to absorb non-domestic-owned bond sales through a new round of quantitative easing. Such action could be justified on the basis of the need for central bank support to lower funding costs through the transitional period of the UK leaving the EU.

From a yield curve perspective, shorter-dated bond yields could outperform as the risk premium at the long end increases on the overall business and economic uncertainty, a weaker sterling and the potential for the UK to return to its more inflationary past.

UK equities

More than half of the UK equity market is owned by overseas investors and it could be vulnerable to weaker sentiment in the short term, particularly among financials and exporters to Europe. That said, large-cap UK indices are driven more by global factors and heavily skewed toward cyclical sectors, such as mining and energy, which are in aggregate beneficiaries of a weaker sterling. Over the longer-term, uncertainty is likely to weigh on the financial sectors, as investors struggle to understand any new regulatory regime.

Further down the market-cap spectrum, domestically-exposed small and mid-cap stocks could see more pressure on the basis of the economic uncertainty presented by a Brexit scenario. In addition, import costs for these companies could rise, due to the deteriorating terms of trade, which would squeeze profit margins.


In the coming months, we would expect a period of subdued activity as overseas investors wait to see how the referendum campaign evolves. However, post June we would expect flows to pick up as international investors take advantage of the fall in sterling, and on the view that any exit will take time and is unlikely to prove damaging to UK asset values in the long term.

What is the likely impact of Brexit from a European perspective?

Clearly if the UK were to leave the EU, we would expect headline noise questioning the validity of the overall EU project. German assets would most likely see a safe-haven bid for euro-based investors in the short term, as equities and bond markets in periphery countries (for example, Spain, Italy and Portugal) could be vulnerable, although a weaker euro could prove beneficial over the longer term to the euro-area’s external economy.

There must be some possibility that discussion over Brexit creates the domino effect of other countries seeking to leave the EU, though this is not our central case. However, we do think that a Brexit outcome might create an opportunity for countries to advance their own individual agendas and renegotiate their own terms of membership with the EU. Overall, we are not expecting the EU to fracture as a result of Brexit, but it could well raise tensions within Europe. At the same time, however, the UK’s exit could strengthen the European Parliament’s hand in leaning towards further progress in areas such as fiscal integration, regulation, taxation, subsidies or investment programmes.

The UK’s potential departure would create a funding gap that would have to be filled by other countries. In 2014, the UK’s net contribution to the EU’s budget was €4.93bn, or 19% of total net contributions. Current net-contributing nations may push for expenditure cuts, while net receivers may ask other countries for greater contributions. Future budget negotiations would therefore have a further layer of complexity. These issues could raise questions around the impact on funding costs of EU supra-national borrowers. For example, could a potential UK departure and the associated loss of UK guarantees lead to ratings downgrades for the EU and the European Investment Bank and thus increase their borrowing costs? It is possible, but in the current climate we expect the impact may be marginal.

Brexit would likely have far smaller financial repercussions compared with the exit of a eurozone country, since the UK has its own currency and fast outflows of bank deposits would be far less likely. With much of the UK exposures most likely funded in sterling and therefore hedged against the currency risk, it would take a very large and persistent swing in the exchange rate, and potentially large-scale defaults in the UK, to actually create a significant impact negative on the rest of Europe.

Finally, how are we positioning portfolios?

While we are cognisant of the risks of the UK leaving the EU, we are not specifically re-positioning our portfolios in anticipation of such an outcome. Other global factors remain more significant drivers of financial market performance – China rebalancing, Federal Reserve tightening and commodity prices.

In any case, we have for some time maintained an underweight exposure to UK equities and to sterling. Our view on sterling was based on expectations of UK interest rates staying low, the higher valuation of sterling after a period of significant strength, and the relative interest rate differential with the US that was likely to favour the US dollar. In the gilt market, we are maintaining a short duration position based on our longer-term expectations for inflation and the Bank of England interest rate cycle.

We have also held a long-term positive view on the UK commercial property market, which has benefitted from supportive supply/demand dynamics and low interest rates. The property cycle is maturing and we would, in any case, expect to be reducing our exposure to this sector through the year, and headline noise surrounding Brexit is also likely to prove a headwind.

In summary, our positioning in assets most exposed to Brexit risks is:

  • Underweight sterling, not solely on Brexit but in response to global factors including Federal Reserve tightening and the significant appreciation that sterling has experienced over the past year or more.
  • Maintain short duration position in UK gilts, with a bias towards shorter-dated bond maturities.
  • Underweight UK equities from an asset allocation perspective, but within UK equities we are holding higher exposure to large-caps versus small- and mid-caps.
  • Maintain exposure to UK commercial property, but with a view to reducing this allocation to reflect the maturing cycle, rather than as a reaction to Brexit.


Northern Trust: Outsourcing Accelerates Through Pandemic as Investment Managers Seek to Improve Margins, Enhance Business Resilience, and Future-Proof Operations



Northern Trust: Outsourcing Accelerates Through Pandemic as Investment Managers Seek to Improve Margins, Enhance Business Resilience, and Future-Proof Operations 1

White Paper Sees Increase in Managers Outsourcing Middle and Front Office Functions to Achieve Optimal Business Structures

According to a white paper published today by Northern Trust (Nasdaq: NTRS), investment managers of all sizes and strategies have been prompted to undertake a comprehensive review of their operating models as a result of the Covid-19 pandemic which has accelerated existing trends that are compounding cost pressures. This has led increasing numbers of managers to outsource in-house dealing and other functions, such as foreign exchange and transition management, hitherto seen as core.

While cost savings remain a core driver, and indeed are one outcome of outsourcing, costs are no longer the only focus. Far from being solely a defensive reaction to increased pressure on margins, the white paper (‘From Niche to Norm’) describes outsourcing as part of the target operating model, or moving toward the ‘Optimal State’ for many investment managers, and  explains how the focus “has expanded to the variety of other potential benefits offered – enhanced capabilities, improved governance and operational resilience.”

Gary Paulin, global head of Integrated Trading Solutions at Northern Trust Capital Markets said: “The pandemic has challenged a range of operational assumptions. Working from home has, for example, questioned the need for a portfolio manager to be in close proximity with the dealing desk. Previously considered essential, the pandemic has effectively forced firms to ‘outsource‘ their trading desks to remote working setups and the effectiveness of this process has disproved the requirement for proximity, in turn, easing the path to third-party outsourcing. Many investment managers are actively considering outsourcing to a hyper-scale, expert provider as a potential, cost efficient solution – one that maintains service quality and, hopefully, improves it whilst adding resiliency.”

Northern Trust’s white paper compares outsourced trading to software-as-a-service stating: “instead of carrying the cost and complexity of running an in-house solution, firms move to an outsourced one, free up capital to invest in strategic growth and move costs from a fixed to a variable basis in line with the direction of travel for revenues.” 

Guy Gibson, global head of Institutional Brokerage at Northern Trust Capital Markets said: “The opportunity to deploy capital to build new fund structures, develop new offerings, focus on distribution and enhance in-house research has been taken up by several of our clients to the benefit of their investment approach, and to the benefit of their investors.  Additionally, in the last two months alone, many firms have recognized that outsourcing to a well-capitalized, global platform has enabled them to take advantage of cost-contained growth opportunities in new markets.”

A further development, which has echoes of the journey the technology industry has already undertaken, is the move towards ‘whole office’ solutions, which represent the next potential wave in outsourcing.

According to Paulin; “recently we have observed a growing number of managers wanting to outsource to a single, hyper-scale professional service provider who can do everything, everywhere. This aligns with Northern Trust’s strategy to deliver platform solutions for the whole office, serving our clients’ needs across the entire investment lifecycle.”

The white paper can be downloaded here.

Integrated Trading Solutions is Northern Trust’s outsourced trading capability that combines worldwide locations and trading expertise in equities and fixed income and derivatives with access to global markets, high-quality liquidity and an integrated middle and back office service as well as other services, such as FX. It helps asset owners and asset managers to meaningfully lower costs, reduce risk, manage regulatory compliance and enhance transparency and operational efficiency.

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How are investors traversing the UK’s transition out of lockdown?



How are investors traversing the UK’s transition out of lockdown? 2

By Giles Coghlan, Chief Currency Analyst, HYCM

Just when we thought we had overcome the initial health challenges posed by COVID-19, the UK Government has once again introduced lockdown measures in certain regions to curb a rise in new cases. This is happening at a time when the government is trying to bring about the country’s post-pandemic recovery and prevent a prolonged economic downturn.

This is the reality of the “new normal” – a constant battle to both contain the spread of the virus but also avoid extended economic stagnation.

Of course, no matter how many policies are introduced to spur on investment, traders and investors are likely to act with caution for the foreseeable future. There are simply too many unknowns to content with at the moment.

To try and measure investor sentiment towards different asset classes at present, HYCM recently commissioned research to uncover which assets investors are planning to invest in over the coming 12 months. After surveying over 900 UK-based investors, our figures show just how COVID-19 has affected different investor portfolios. I have analysed the key findings below.

Cash retreat

At present, it seems that by far the most common asset class for investors is cash savings, with 78% of investors identifying as having some form of savings in a bank account. Other popular assets were stocks and shares (48%) and property (38%). While not surprising, when viewed in the context of investor’s future plans for investment, it becomes evident that security, above all else, is what investors are currently seeking.

A third of those surveyed (32%) said that they intended to put more of their wealth into their savings account, the most common strategy by far among those surveyed. This was followed by stocks and shares (21%), property (17%), and fixed interest securities (17%).

When asked about what impact COVID-19 has had on their portfolios throughout 2020, 43% stated that their portfolio had decreased in value as a consequence of the pandemic. This has evidently had an effect on investors’ mindsets, with 73% stating that they were not planning on making any major investment decisions for the rest of the year.

Looking at the road ahead

So, it seems that many investors are adopting a wait-and-see approach; hoping that the promise of a V-shaped recovery comes to fruition. The issue, however, is that this exact type of hesitancy when it comes to investing may well slow the pace of economic recovery. Financial markets need stimulus in order to help facilitate a post-pandemic economic resurgence, but if said financial stimulation only arrives once the recovery has already begun, the economy risks extended stagnation.

It seems, then, that there are two possible set outcomes on the path ahead. The first is a steady decline in COVID-19 cases, then an economic downturn as the markets correct themselves, followed by a return to relative economic stability. The second potential outcome is a second spike of COVID-19 cases which incurs a second nationwide lockdown – delaying an economic revival for the foreseeable future. At present, the former of these two scenarios is seemingly playing out with economic growth and GDP steadily increasing; but recent COVID-19 case upticks show that it’s still too soon to be certain of either scenario.

A cautious approach, therefore, will evidently remain the most common investment strategy looking ahead. But investors must remember that, even in the most uncertain times, there are always opportunities for returns on investment. Merely transforming a varied portfolio into cash savings risks a long-term decline in value.

High Risk Investment Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. For more information please refer to HYCM’s Risk Disclosure.

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Hatton Gardens 5 top tips for investing in Diamonds



Hatton Gardens 5 top tips for investing in Diamonds 3

By Ben Stinson, Head of eCommerce at Diamonds Factory

Investing in diamonds can be extremely rewarding, but only if you know what to look for. For investors who lack experience, finding your diamond in the rough can be quite daunting.

For even the most beginner of diamond investors, the essentials are fairly obvious. For instance, you need to ask yourself will the diamond hold its value over time? What’s the overall condition of the stone and the jewellery? Is there history behind the item in question?

Although common sense plays a big part in investing, people often need insider tips and tricks to go from beginner to expert. Tony French, the in-house Diamond Consultant, at Diamonds Factory shares his professional knowledge on the 5 most important things to look for when investing in diamonds.

1: Using cut, weight and colour to determine value

Firstly, consider the shape, colour, and weight of your diamond, as this can play a pivotal role in guaranteeing growth in the value of your item. Granted, investing trends change with time, but a round cut of your diamond will almost always be the most sought after. The cut of your diamond is incredibly important, as it can influence the sparkle and therefore, the overall value. It’s a similar story for the intensity of some colours, such as Pink, Red, Blue, Green etc. Concerning weight, the heavier (bigger) stones will generally increase in value by a bigger percentage. Collectively these factors also contribute to the supply and demand aspect, which will determine their high price, and will ensure your item is re-sellable.

2: Provenance

Looking for significant value? Well, aim to own jewellery or diamonds that come from an important public figure. If you’re lucky enough to own a piece that has significant history, or was owned by a celebrity or person of interest, it’s an absolute must to have concrete evidence of this. Immediately, this proof will increase an item’s overall value, and there’s a good chance the stardom of your item might drum up interest amongst diehard fans, increasing the value even further…

Equally, it’s possible to proactively bring provenance to unique diamonds of yours. For instance, you can offer to loan bespoke, or unusual pieces for film, theatre, or TV performances – then it can be advertised as worn by xyz.

3: Find the source

Ben Stinson

Ben Stinson

Establishing your diamond’s source is one of the most important things you can do when investing in diamonds. If you’re starting out, try to purchase diamonds that have NOT been owned by too many people, as the overall value of the diamond will reflect multiple ownership. Alternatively, I’d always recommend buying from suppliers like ourselves or other suppliers and retailers, who buy directly from the people who have had them certified.

Primarily, this will allow you to have a greater degree of transparency, which is crucial when buying such a valuable item. Next, you should immediately see an increase in value of your diamonds, as identifying a source will allow traceability and therefore, market context.

4: Certification

Linked closely with my previous point, is the requirement to ensure that your diamonds are certified by a credible lab, and you have the evidence to prove so (a written document with specific grading details about your diamonds) – this will remove any doubts of impropriety.

It’s essential to remember that not all labs are the same, and many labs are better than others. Both the AGS (American Gem Society) and GIA (Gemological Institute of America) have great reputations and are world renowned. I’d recommend doing your own research into the labs, and when you’ve found the pieces that you’d like to invest in, then make an informed decision based upon your findings. Ultimately, proving certification will make your stones easier to insure, and deep down, you can have peace of mind knowing you have got what you have paid for.

Don’t forget to keep this paperwork in a safe location as well – you’d be surprised how many people we’ve met who have lost, or forget where they’ve placed it.

5:  Patience is a virtue…

If the market is strong, it might be tempting to look for an immediate sale once you’ve purchased a high value item. However, I suggest holding onto your diamonds for some time before even thinking about selling. More often than not, an item is more likely to increase in value over a few years than a few days – try and wait a little longer!

Equally, I would encourage having your diamonds, or jewellery professionally valued regularly. If you don’t have the knowledge to make a rough judgement on how much your pieces are worth, a consultant or expert can provide both a valuation, and contextualise that amount in the wider market. From there, you should be empowered with the knowledge to decide whether to keep or sell.

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