WHAT explains the recent highs in the American stockmarket? One explanation is that the markets were nervous over the British referendum on the EU; before the vote, it was cited as the biggest risk in the markets by 30% of fund managers in a Bank of America poll. After the vote, however, investors seem to have concluded it is mainly a UK and EU issue; indeed even in the latter, it does not yet seem to be inspiring other countries to depart. So investors who were sitting on the sidelines have piled back into equities.

However, the Brexit vote did drive government bond yields lower, pushing those in Germany and Switzerland even further into negative territory. And it seems likely to inspire a rate cut in Britain and may cause the Federal Reserve to hold fire on further rate rises for a bit longer. In other words, the returns in cash and bonds are pretty dismal.

In the circumstances, equities look like the only game in town. so the outlook would have to be absolutely dreadful for investors to avoid them....Continue reading