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How political risk affects investments

At the moment there’s a lot of talk on both sides of the Brexit argument about the potential impact of the UK leaving the EU either with or without a deal.

Since Boris Johnson became Prime Minister he has frequently said that the UK will leave the EU on 31 October come what may, with or without a deal, which sets him aside from Theresa May and makes the likelihood of it happening higher than it was.

For investment managers this sort of political risk is something they need to consider when making investments. At a very basic level, they need to ask whether the influence of the UK leaving without a deal is likely to firstly, happen; and secondly, aid or harm the performance of investments over the duration of the investment term and if so, how can they mitigate this by choosing investments less likely to be affected.

Don’t confuse economic performance with UK equities

Within UK-based investments at the moment there has been recent evidence of currency risk as Sterling has slipped against the Dollar and the Euro. The performance of Sterling tends to move with political rhetoric as investors try to work out the likely Brexit scenario. However, as the aftermath of the 2016 referendum showed, a drop in the value of Sterling can have a positive impact on the FTSE 100 as many firms are international and this can play to their advantage. The fortunes of the UK stock market should not be confused with that of the UK economy. Barely a third of the profits of UK listed companies are derived in the UK and half of all their dividends are declared in either dollars or Euros.

The importance of political risk

What these risks show is that political risk is just one of a number of factors that can impact investments. To counteract this, investments are diversified (assets from lots of different asset classes are selected to spread risk) and investment managers have been pricing in this risk and reducing their exposure to an economic shock in the run up to Brexit.

7IM, one of Wren Sterling’s investment panel partners said this in its most recent markets update: “We continue to monitor the UK political environment closely, in order to make sure portfolios are not overly vulnerable to political shocks.” That’s typical of what we would expect investment managers across the UK to be saying between now and the end of October.

What Wren Sterling is doing about it?

We trust our investment partners to make decisions in the best interests of our clients but we perform regular oversight on our panel of selected investment managers to make sure they continue to offer our clients good value for money.

As our financial plans are created with long-term success in mind we know that there are bumps in the road (Brexit could well be one of them) but the most important aspect is to stay invested in the market and to review requirements regularly to ensure their ongoing suitability.

Concerned about Brexit?

Wren Sterling will be running a series of comment pieces in the lead up to 31st October and your adviser is always on hand to answer any queries you have about your financial plans.

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Important: The content of this article has been compiled on the opinion of Wren Sterling and does not constitute or imply any financial advice or investment strategy, you should seek Independent Financial Advice regarding you own individual circumstances before embarking on any course of action.

The value of an investment may go down as well as up, investors may get back less than their original investment.