Over the last year the UK has voted to leave the European Union and the government has promised to follow through with this. That is not news, in fact, many of us are suffering from Brexit fatigue. We know we’re potentially facing years of uncertainty, what we don’t know and what we need to know is how to manage our money through uncertainty.
The chances of a UK recession
The big risk the UK faces after the vote to leave is to slip into recession. The ‘Remain’ campaign focussed on economic forecasts and became known as project fear. Since 23 June our currency has taken a hammering, inflation has started to increase, the construction industry is not doing well and our growth prospects have been revised down.
At the start of August, many economists were saying there was 50:50 chance of the UK economy slipping into recession before the end of the year. But that was before the Bank of England halved interest rates and before a lot of the economic data had been released.
An article in the Telegraph later in August said that ‘Britain’s economy will slow down but should not go anywhere close to a recession’. The lower pound actually supports our economic growth as our exports become cheaper. Indeed, data pointed to an increase in consumer confidence following the vote to leave. According to economic forecasts, we’ll be nowhere near the GDP level that was seen in 2008.
But there are still risks in the market, investors need to look at Eurozone growth, US interest rates, the US election, growth in China and many other events. The uncertainty seems relentless. But with the base interest rate at 0.25% the savvy saver really can’t afford to leave their money in cash, especially if inflation goes up, as many predict it will.
Protecting assets through diversification
Investing could be the potential knight in shining armour, but with market risks, the value of an investment can go up as well as down and investors need to make smart decisions.
At Moneyfarm a key element of our investment strategy is diversification. This is based on modern portfolio theory, different asset classes and markets are unlikely to go up and down in time with each other so having diversified exposures means you can even out your performance. We combine this with strong risk management suited to our investor profiles, we ensure that no portfolio takes on too much volatility to avoid any nasty surprises.
We stress test our portfolios against numerous events such as those mentioned to see how they would perform. Prior to Brexit we tested our portfolios against a 10% drop in the pound and were confident that our customers’ assets were well protected against this.
But what could happen if we did face a situation like 2008? That extreme drop is now hopefully unlikely to happen in the near future but if it did happen we would likely see a drop across our portfolios, but this is controlled and unlike what would happen in the markets.
In the month following the collapse of Lehman Brothers the MSCI world index (global equity) dropped by 14% for UK investors. By comparison, Moneyfarm’s most risk averse portfolio would have dropped by 3.2% and the riskiest portfolio by 10.5%.
This was an extreme situation but having exposure to sovereign bonds and other asset classes and currencies helped prevent our portfolios from dropping as much as markets that month.