2015 has been a very interesting year for the UK from a financial perspective. For example, the General Election was a major worry for many investors, with the outcome of a majority government generally being seen as a positive thing. Then there has been ultra-low inflation which, at times, has turned negative and has been a key reason why the Bank of England has kept interest rates at historic lows.
This, of course, has had a positive impact on the housing market, with average prices rising from £192,954 in January to £205,240 in November. This rise of 6.4% is clearly much better than the FTSE 100‘s fall of 3%, but still lags behind the FTSE 250‘s gains of 8% year-to-date. And, with worries about China dominating investors’ thoughts, a tumbling oil price and concerns about rising US interest rates on the horizon, investors have generally been relatively nervous this year.
Interest Rates Of 1% Or Less
Looking ahead, it seems likely that interest rates in the UK will remain exceptionally low in 2016. In fact, an interest rate beyond 1% seems highly unlikely because inflation is stubbornly close to zero. As such, policymakers at the Bank of England essentially have their hands tied, since their biggest fear is sustained deflation over a prolonged period. Increasing interest rates while inflation is barely positive could be the catalyst for this to take place.
Clearly, the UK economy is performing well but, with China’s growth rate slowing, a continued deflationary spiral seems likely to prevail across the globe throughout the coming months. This should ensure that the Bank of England makes only a token tightening in monetary policy next year.
No Rise In UK House Prices
However, low interest rates may not keep the UK house price engine ticking over. That’s because the impact of a 3% stamp duty surcharge on demand for property could prove to be significant and has the potential to severely weaken demand. This, alongside the planned reduction in mortgage interest relief plus the tighter mortgage lending rules for owner-occupiers which were introduced this year, mean that the outlook for the UK property market is rather unappealing. This could put off many would-be landlords from taking the plunge.
Furthermore, if interest rates do rise in 2016 – even by just 0.25% — it would cause profit margins for buy-to-let investors to fall. More importantly, though, it would signal that the sector is in a new era where money will not be so cheap and property will not necessarily be a one-way ticket to riches.
FTSE 100 To Close Above 7,000
Meanwhile, the prospects for the FTSE 100 are relatively bright. Clearly, there is a considerable amount of uncertainty due to the prospect of US rate rises as well as the impact of a slowing China on world growth. However, investors have had a very, very long time to come to terms with both of these challenges and the FTSE 100’s correction in August appears to have factored in both of these concerns.
With the resources sector unlikely to post the same degree of falls in valuations as in 2015, the financial services sector being very cheap and the US and UK economies performing well, the FTSE 100 could have a very prosperous year in 2016. And, with the Eurozone yet to fully feel the impact of quantitative easing, the profitability of UK-listed companies could beat expectations next year, while the FTSE 100’s 3.8% yield also indicates that the index offers good value for money.
