After over four years of negotiations, the UK and the EU are still yet to agree on a concrete future trading arrangement after Brexit. Various iterations of the UK government have tried, but a number of key issues have held up talks. With no deal now seemingly the most likely outcome, many see now as the time to assess their investments.
Naturally, UK investors often have a home country bias, meaning the fate of their portfolios is more intertwined with the success of UK business than investors from overseas. This being the case, Brexit throws up a number of considerations for investors to consider, from the need for a long term outlook to the price of UK equities.
Fluctuation in the pound
The outcome of Brexit will clearly weigh heavy on the performance of the pound. Just about every significant Brexit announcement since 2016 has had an impact on its value, and the eventual outcome of Brexit will continue to have an effect over the medium-term.
In simple terms, a messy, difficult Brexit is likely to hurt the value of the pound – you would expect the pound to fall against other currencies in the event of yet more uncertainty and a bad outcome for the UK. Equally, a Brexit that is messy – but, crucially, not as messy as expected – could strengthen the pound.
A weakened pound isn’t necessarily the problem for UK investors that you might expect – foreign assets would rise in value if the pound weakens (if unhedged). If the pound strengthens, then we see the reverse effect. If managed correctly, a globally diversified investment portfolio can benefit from a weak pound.
What is truly relevant is how the performance of the pound stacks up against expectation. The price of the pound is only ever a representation of what people deem it worth, based on where they see its value going in the future. One of the biggest factors in that eventual value will be the outcome of Brexit. So, if Brexit is a success, the pound might outperform its current value, while the opposite could be true in the case of a messy, unfavourable Brexit scenario.
Time to assess UK equities
One positive way to spin the development of Brexit is that the UK stock market is cheap right now – really cheap. To find prices this low in the UK, compared with the global average, you have to go back decades.
The caveat here is that it is undeniably a difficult environment in the UK at present. Just about every country on earth is contending with Covid-19 – although, it must be said, to differing extents. With Brexit added to an already extensive bill of issues, it is, economically speaking, another problem UK companies simply do not need.
There is an argument, however, that the worst has already been priced into UK equities. Boris Johnson’s second one-month lockdown barely caused a ripple in the markets, which the FT’s Stefan Wagstyl suggests could be a sign that “we are near the floor”. These low starting valuations are attractive to investors, particularly in opposition to high starting valuations (like we see in US tech).
How cheap the UK stock market currently is depends on your perspective. If you take the more positive view that there will be successes within Brexit, then UK equities could represent a bargain. If you expect Brexit to hinder the UK economy, the price is representative and UK equities might not be appealing.
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We’ll talk about diversification in a moment, but having a spread is something investors should be considering. At Moneyfarm, we are monitoring the value of UK equities but we are not necessarily looking to take action right now – it’s an area that’s on our radar, but we’ll only move if we’re confident that our clients will benefit.
Little change for many investors
Ultimately though, while Brexit may seem enormous for some investors, for many there will be little to no seismic activity. The investors who will be most adversely affected by any uncertainty or losses thrown up by Brexit are those attempting to time the market or those with investments in only a handful of UK businesses.
At Moneyfarm, our commitment to global diversification and a long-term outlook means that, from our perspective, Brexit is just part of much wider economic considerations. We believe that global diversification is the most effective and efficient way to manage our portfolios.
By spreading your investments across different geographies, you can greatly reduce your exposure to one single economy. So, if the UK struggles over the short term, you can hope to offset any weaknesses in your portfolio with gains made in other regions while benefiting from foreign exchange movements. Equally, global diversification means an investor is generally less inclined to make knee-jerk, rash decisions based on short-term performance.
Tips for investors
For investors, the coming few months and years might represent an uncomfortable degree of uncertainty. As ever, there are a few things investors can do to navigate the seemingly endless Brexit process safely:
Think long term. Anyone looking to grow their wealth through investments should always see it as a long term project. Never is this more true than in times of relative uncertainty. The longer you have to invest, the more capacity you have to absorb short-term fluctuations. To limit your real risk while investing, set long-term goals that give you the best chance of seeing steady growth.
Diversify. Core to any balanced investment strategy, diversification is only made more important during periods of geographical uncertainty. Investing across a variety of currencies, asset types, geographies and industries means that, whatever the immediate impact of the ongoing Brexit negotiations, portfolios will be somewhat protected – any losses made in one area can be covered for with gains elsewhere, in theory.
Get expert help. Ultimately, one of the best things investors can do in times of uncertainty (and, in many cases, generally) is to seek expert guidance. Having someone with the expertise and, crucially, the time to manage investments effectively can make all the difference to the long-term health of your portfolio.
What this all comes down to is being sure that you’re invested in a portfolio that reflects your financial situation, appetite for risk, financial goals and time frame, so you can avoid any knee-jerk reactions to short-term Brexit noise. Brexit has been the biggest economic story of the past four years for the UK investor but it need not define your portfolio’s performance. With the right long-term outlook and effective diversification, Brexit can be little more than a detail in a much wider story.