As the Brexit deadline of 29 March 2019 approaches, what impact will Brexit have on UK investors?

Brexit has been dominating the UK media and political agenda and every day we hear about the latest impasse, as well as the developments, negotiating stances and details. It is almost impossible to escape the noise. This is particularly so given that much of the news this summer has focused on the possibility of a no-deal Brexit.

Several commentators believe a no-deal Brexit would be catastrophic but then we heard similar comments around the time of ‘Project Fear’ and many of the ‘doom and gloom’ predictions emanating from that did not materialise. With leading economists split over whether Brexit will be good or bad long-term for the economy, and with no clear steer yet as to what sort of Brexit we will end up with, even though we are ostensibly only 6 months away from exit, it makes it doubly difficult for investors to know what to do.

From an investor’s point of view, therefore, the one thing we can be sure about is uncertainty. Investors and companies dislike uncertainty, as this tends to lead to volatility, and we have seen some of that over the past few months. In the short term, it is likely that markets could stay volatile, although the outcome should obviously become clearer as we approach the deadline.

However, it should be borne in mind that volatility is rarely a consistent, lasting driver of returns. Further, share prices tend to be influenced by investors’ expectations of future events, so markets have to some extent ‘priced in’ much of the no-deal Brexit information. It is now argued by some that the negative sentiment towards UK equities at present has been overdone, making UK companies more attractive and creating opportunities for investors.

Of course, the reason the Brexit situation is of high interest to UK investors is because they typically have significant exposure to UK equities. The reality is, having a more diversified portfolio probably makes sense at any time, and this is certainly the case right now with Brexit looming.

Diversification across different countries, sectors, and different types of fund means that when one area underperforms, others should hopefully pick up the slack to help smooth out returns. We live and operate in a global world, and whilst Brexit weighs heavily on our minds in the UK, markets across the world are perhaps more affected at the moment by the US/China trade war and the current emerging markets ‘crisis’.

Because of this, you should not let Brexit unduly affect your long-term investment plans. However, it could be a good time to review your investments, both to evaluate whether you need to rectify too much of a ‘home bias’ and to ensure your portfolio is still on track to meet your long-term needs. With the current global market uncertainties, thought should also be given to mitigating risk through the well-established approach of diversification across lowly correlated assets.

Holding some cash too may make sense. Not being fully invested is a sensible approach in volatile and uncertain times, until you are ready to invest again.

If you do want retain your exposure to UK equities, over the coming months it might be the time to use active managers rather than a passive strategy, given the wide range of possible outcomes. You might also want to consider where you are invested on the market cap spectrum. The UK stock market is not the UK economy, with 70% of FTSE100 revenues coming from outside the UK, so any fall in the pound makes these offshore revenues bigger in sterling terms. However there could be also opportunities for long-term investors in the small and mid-cap arena.

So plenty to think about and this just skims the issues and the options. For more information about the possible impact of Brexit on your investment portfolio, contact Kellands.

 

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