Investment portfolios can be comprised of assets from anywhere in the globe resulting in millions of different potential combinations. Whether you’re investing in an index or tracker fund (which tracks a particular index – like the FTSE 100 or global markets as a whole) or an active fund, where fund managers pick investments trying to back winners, the factors that influence your chances of success are infinite.
Some factors are a bigger influence than others though. The equities markets (where investments are generally made, along with government bonds) are dominated by US firms. In 2018, US companies accounted for over 53 per cent of total global equities – i.e. publicly listed companies that you can buy shares in. The UK was third on the list with 5.5 per cent, behind Japan on 8.4 per cent.
This is why fund managers are primarily concerned with global markets and conditions rather than the UK specifically. This is not to say that Brexit and a slump in the UK’s gross domestic product GDP will not have an impact on investments (as the UK is the 5th largest global economy in terms of GDP) but it really depends on your individual investment portfolio design as to whether that will affect your investments.
How likely is Brexit to happen?
It would take a brave person to predict the outcome of Brexit right now given the political and legal wrangling that appears to lie ahead. However, Investec recently published a ‘thought experiment’ based on different Brexit scenarios and this was their conclusion:
Hard Brexit Impact: Assuming similar asset class impacts to the period around the Brexit vote, a hard Brexit on 31st October would see sterling-denominated portfolios rise by a low single digit percentage. The main driver would be the assumed 10% fall in £/$, meaning any non-sterling economic exposure would be revalued upwards due to currency translation effects.
Soft Brexit Impact: For a mirror image of the same reason (sterling appreciation repricing non-sterling economically exposed assets downwards purely due to translation), a soft Brexit could see a fall in sterling-denominated balanced portfolios of similar magnitude.
Again, this only becomes relevant to an investor if they have a portfolio with UK equities in it and even then, a large percentage of UK equities. Investec believes there’s an 80-20 chance of a hard and soft Brexit (if Brexit happens on 31st October), so even equipped with that knowledge, the investor still might lose out if there’s a soft Brexit.
Don’t forget this is just Investec’s view of potential outcomes! Of course, this is all without mentioning the fact that previous predictions on economic performance have been somewhat wide of the mark ever since the EU referendum was announced.
What can anyone do about it?
Diversification is a fund manager’s best defence against a range of outcomes. As we reported last time in our article about political risk, fund managers have by and large already priced in Brexit.
Taking a long-term view, as all investment strategies should be, always helps as well. Brexit may feel like a monumental change – and this isn’t to downplay it – but historically speaking, the UK has survived World Wars and recessions. Our chart of investment performance over time illustrates the inherent resilience of investments in the face of major world events.
Understanding the context of Brexit and its impact on investments is another way of getting to grips with events. We may not be able to influence the outcome in many ways but feeling informed can make us feel in control of our own destiny and knowing experts are working on our behalf can bring additional comfort.
This is why Wren Sterling works with experts to manage investment strategies on behalf of our clients, while we ensure all of our clients’ finances are working as effectively as they can to achieve long term goals.
Let’s face it, too long spent thinking about the potential outcomes of a potential Brexit can leave anyone light-headed.
You’ve worked hard for your cash, now’s the time to make your cash work hard for you
Ahead of the imminent new tax year, it’s important to know how to take advantage of the higher cash...
Managing the Money Purchase Annual Allowance limit
As new pension drawdown options grow in popularity, earlier this year the Government implemented a c...
If your bond is ready for encashment, remind yourself of the rules before you act.
What is a with-profits bond?
A 'with-profits' bond is a type of pooled investment. These plans have some particular features that...
Bear with me, don’t panic, keep at it
Wren Sterling Group's new CIO Rory McPherson reflects on what is happening in the markets and sees r...
A crazy few days and what happens next?
Following our initial response to the Mini Budget, Kwasi Kwarteng rows back on his plan. How will th...
What’s going on with ‘defensive’ investments
With inflation at a 40-year high, this is bad news for bond investors as the level of return they ge...
Is the UK property market reaching the end of the boom period?
UK house prices increased by an average of 12.4% in 2022, sustaining a trend of rising prices that h...
Higher house prices upset estate planning in 2022
With UK average house prices increasing, investors are closely monitoring this rise. Homeowners may...