Until recently, the UK appeared to have no obvious exit strategy. Now, Theresa May’s Chequers Plan is threatening to tear her Conservative party down the middle. Boris Johnson is waiting in the wings, dressed up and ready to enter stage left as one of the ugly sisters. Politics is a pantomime right now. Oh no it isn’t? Oh yes it most certainly is.
Political histrionics aside however, and it's actually not all doom and gloom. A recent OECD* study projects that global growth (after inflation) will rise by 3.7% in both 2018 and 2019 with the IMF quoting the same figure. The UK itself is predicted to grow by 1.3% by the OECD with the IMF quoting 1.4%. Meanwhile employment in this country is at a record high, with real wage growth also on the rise, since 2015.
The political noise from Brexit may be distracting, like a screaming child in the quiet zone on your train. However it’s important to block out the noise and focus on your investment fundamentals – rely on your carefully-planned and constructed portfolio, to see you through this political storm.
Below we’ve set out three risks which could impact markets in the lead up to and following Brexit, and how sensible portfolio planning can help you mitigate them:
1. Equity Market crash – in the UK and elsewhere
Before we even reach Brexit on 29 March 2019, Theresa May has to deliver her plan to the House of Commons. If her plan is thrown out, May’s government could collapse. This could trigger a leadership contest, or even a General Election. This, and the nature of the deal the UK eventually agrees with the EU, could cause market volatility. UK equity prices could plunge across the board, with companies across Europe and the rest of the world also potentially impacted.
2. A plummeting pound
As a dumb-founded David Cameron stood down from his Prime Ministership in the hours after that extraordinary referendum result back in June 2016, the pound plummeted against the dollar and the euro. A no-deal/poor deal Brexit could cause the pound to tumble once more.
3. A fall in UK bond prices
The economic impact of a poor Brexit outcome could put pressure on the cost of borrowing, with investors in bonds issued by the UK government, or UK companies, demanding higher yields as compensation for the perceived higher risks. Higher yields mean bond prices fall, which would take time to recover.
DO NOT PANIC. Trusting your robust, diversified investment portfolio at times of potential crisis, is definitely what we’d recommend. If that’s not enough to reassure you, here are three things that should:
Keep calm and stay diversified
A well diversified portfolio should give you exposure to a wide range of markets, countries and assets. Being over-exposed to any one country can be dangerous, particularly when negative news occurs in that part of the world. Stay well diversified, and resist increasing your equity:bond ratio. Mystic Meg couldn’t tell you the perfect time to enter or exit different markets, so why bother trying – at the risk of losing a small fortune.
Spread your currency risk
If you own overseas equities, then your portfolio will be exposed to the currencies linked to those assets. Should the pound tumble post-Brexit, this will have a positive effect on your non-GBP holdings.
Owning short-dated, high quality bonds
Bonds should act as the boring but reliable asset class in your portfolio. You should avoid buying lower quality, high-yield or sub-investment grade bonds, as these act more like equities at times of economic crisis.
The Brexit omnishambles doubtless has many more twists and turns to negotiate in the road ahead. But staying true to your diversified investment portfolio will give you the best chance of achieving your investment goals, despite all the political noise.
Past performance is not necessarily a guide to future performance and you may get back less than invested.
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