Brexit…keep calm and carry on!

With the referendum vote almost upon us, we’re considering the impact Brexit could potentially have on investment portfolios.

The market risks may seem material, but they are mitigated by the ownership of robustly structured, well-diversified portfolios. The key, as always, is to stay calm in the face of market uncertainty. To quote John Bogle,‘this too shall pass.’

How did we get here?

The Brexit referendum is a long way from the heady days of 1973. Urged on by Ted Heath, the UK became a fully paid-up member of the European Economic Community, by an emphatic margin of two to one. From Thatcher’s EU budget rebate in 1985 to our short-lived membership of the Exchange Rate Mechanism in 1992, the relationship between the UK and the EU hasn’t been entirely smooth.

Yet despite the challenges, the EU has created democracy, cooperation and tolerance making the UK voters’ decision a big one. And it’s being made no easier by the polarised positions of the Leave and Remain camps with unedifying personal attacks, loose use of data, personal ambition and party division.

How does this relate to an investment portfolio?

The financial media has been writing about the need to position investment portfolios for a vote to leave. But this assumes an investment manager can foresee what is going to happen. It also assumes that Brexit is a bigger risk than, say, Putin’s increasing militarism, the enduring events in the Middle East, North Korea’s nuclear programme, Donald Trump becoming the next US president, or some other geo-political event/natural disaster yet to occur.

Any long term investment journey should only be started with the realisation that such events occurring over time is to be expected. Indeed, the market’s view of potential outcomes will already be reflected in market prices. The aim shouldn’t be to try and reposition the portfolio for each event, but to be invested in a robust, well-diversified portfolio that weathers all investment seasons.

That said, there are short-term market risks to a vote to leave the EU:

• Greater volatility in the UK (and other) equity markets. It’s certainly possible that the UK equity market could fall and we witness a period of increased volatility as the market comes to terms with what leaving means for both the UK and the wider global economies.
• A fall in Sterling against other currencies. 2016 has already witnessed a fall in Sterling against other global currencies. For instance, the pound has fallen against the US dollar from 1.48 to 1.45 and from 1.36 to 1.27 against the Euro.
• The Chancellor, amongst others, suggested that the cost of borrowing might rise as investors looking to hold UK Government Bonds will demand higher yields to compensate for the greater perceived risks of the UK economy being out of the EU.

The answer to these risks is quite simply owning a well-diversified portfolio that has exposure to global equities and the emerging markets. Such portfolios should be less effected than those containing a bias to the UK market.

It’s worth remembering that having ownership of overseas equities will come with the currency exposure linked to those assets. Lastly, owning high quality, short duration government bonds, diversified again on a global basis will provide both protection on risk assets and less sensitivity to increases in bond prices.

At times like this, it is easy to become overly concerned about near-term events, such as the outcome of this referendum. So remember:

• The value of your portfolio simply tells you how much money you would have if you liquidated it today. You only make actual losses if you sell assets. If you don’t sell, they remain in your portfolio to deliver future returns.
• If your portfolio has a well thought out, robust structure – stick with it.
• Some assets will be doing well at times when others aren’t. It’s impossible to predict which are rising at any point in time. Markets work well enough to make jumping from one asset class to another a dangerous strategy.
• Your adviser cannot control what markets do, nor can fund managers.

While we all have responsibilities to take an interest in the EU referendum and other elections, it’s by no means clear that these events by themselves have long term implications for our decisions as investors. That is much more a matter of our own goals and risk appetites, our investment horizons, the structure of our portfolios, our degree of diversification and costs.

Whether your inclination is to remain or leave the EU, remaining invested and leaving your portfolio to work for you is the best course of action. So now all you need to do is vote!

If you would like to discuss any of the above in more detail, please speak to your usual Cooper Parry Wealth contact or email Jonathan Elsigood.