How will Brexit affect my investments?

This is a question I get asked a lot lately and so I’ve decided to write a small article with my thoughts. I hope it helps anyone else with the same concerns…

The answer really comes in 2 stages:

It depends on how much of your portfolio is exposed to the markets predominantly affected by Brexit i.e. the UK and the Eurozone.

You can easily find this out by looking at something called your ‘asset allocation’. This is a fancy word for where your money is spread. Your asset allocation can show the geographical area’s your money is invested in and in what percentages. Asset allocation can also show the different sectors you are invested in and the spread across specific industries i.e. banking, telecoms etc.

You can see below an image of a clients asset allocation that shows the asset classes, the sectors and the regions.

The simple point to note is the more your portfolio is exposed to the regions affected by Brexit the higher the likelihood of the effect on your portfolio.

However, please remember this….even if you have a large proportion of your portfolio in UK or European funds that doesn’t necessarily mean that they are totally focused to that area. The companies you are investing in may be based in those areas, but their trade won’t necessarily be restricted to those areas. For example, as of today the 5 largest holdings in the FTSE are:-

HSBC (8%)
Vodafone (5.76%)
BP (5.46%)
Royal Dutch Shell (5.02%)
British American Tobacco (4.07%)

Do you really think that these multinational companies derive ALL their income from the UK?

OK, now onto the second (and more difficult) answer to ‘how will Brexit impact my portfolio’?

Now the answer I’m going to give you is as truthful as I can be…and it’s this….no one really knows. Sorry to seem like an uninformed adviser here but Brexit has never happened before and how both the UK and the European economies will react is something new we will all experience.

Sure, there are lots of people out there claiming to know what will happen….the Brexiteers have lots of information about economic studies showing Britain will once again become an economic powerhouse in the future once the shackles of EU rules have been released. Likewise, the Remainers have similar studies showing that we are committing financial suicide by removing the UK train carriage from the European diesel engine.

Also, and this is important to note, there are lots of people out there who are not interested in reporting the real truth. They are motivated instead by what story will generate most interest. Newspapers and TV media will often prefer to drop in a one-line quote stating ‘the world is about to collapse’ rather than ‘we’re not really sure what will happen’ as they know which headline will sell more copies. Please bear this in mind when listening to media outlet reporters!

One thing we can state is that markets do not like uncertainty. Trump vs China and Brexit have created a lot of uncertainty of late and this has impacted investment returns, especially from Sept 18 to January 19.

So, what can I do to minimise damage? Well here are a few suggestions that I hope will help:

Make sure you are well diversified. Your portfolio should have many eggs in many baskets. Increasing your asset allocation to more economies and sectors will decrease risk whilst spreading your investment between different sectors such as equities, fixed interest, property, plus alternatives will reduce the effect of an adverse condition in one sector or one area affecting your overall portfolio.
Understand you are investing for the long term. Over the last 100 years the stock market has faced many ‘uncertainties’. World wars, great depressions, dot-com bubbles, credit crunches. These have all affected market conditions but only for a set time. They’ve been and gone and the markets are still operating… and generally on an upwards trend.
Don’t try and time the market. I have had clients who have requested to sell their portfolio and place it in cash until Brexit is over with. I have major concerns with this strategy and have 2 questions for anyone thinking along the same lines…a) how do you know markets will fall? b) when will a negative impact of Brexit really finish?

Let me remind you of what happened when Brexit was announced in June 2016 by showing you the chart below that shows the last 3 years of both the FTSE 100 (UK stock market) and the DAX (the European market). Interesting to see how both markets REALLY reacted to the Brexit vote in June 16 isn’t it?

Brexit Announcement – The effact on the UK and Euro zone stock markets

The other issue with trying to time the market is that you have to try and time both the top AND the bottom of a drop curve to make gains. So, you have to get it right TWICE.

Can you really do that? If not then I suggest you consider a more long term strategy for your investments.

Brexit is a discussion topic that never seems to end at the moment but I hoped this article has helped somewhat. Of course, if you are still concerned about the potential affects of Brexit or if you would like a free, no obligation assessment of your portfolio then feel free to get in touch with me at brian@idealfinancialmanagement.co.uk. A minimum portfolio value of £150,000 is required.

Best regards

Brian