Brexit and your portfolio

We know that some people might be feeling a bit uncertain about what Brexit holds for the country and its businesses. In these situations, it’s important to keep your feelings in check and make sensible decisions around your investments. That’s one of our six guiding principles – ‘Control your emotions and think long-term’.

Perhaps we’ll exit the EU without a deal and there’s a chance the current government will fall if this happens. But sensible portfolio structures can mitigate any investment risks that might accompany these events. Let’s explore the 3 main risks in more detail…

Risk 1: Greater volatility in the UK and possibly other equity markets

In the event of a poorly received deal or no deal, it’s possible that the UK equity market could suffer as it tries to come to terms with what this means for the UK and global economies. A collapse of the government would add further uncertainty.

Risk 2: A fall in the pound against other currencies

In 2016, after the referendum, the pound fell against major currencies including the US dollar and the Euro. There is certainly a risk that Sterling could fall further in the event of a poor/no deal.

Risk 3: A rise in UK bond yields (resulting in a fall in bond prices)

The economic impact of a poor/no deal could put pressure on the cost of borrowing, with investors in bonds issued by the UK Government (and UK corporations) demanding higher yields on these bonds in compensation for the greater perceived risks. Bond yield rises mean bond price falls, which will take time to recoup through the higher yields.

So how can we reduce these risks?

Global diversification of equity exposure

Although it is the World’s sixth largest economy (depending on how you measure it), the UK produces only 3% to 4% of global GDP, and its equity market is around 6% of global market capitalisation. Well-structured portfolios hold diversified exposure to many markets and companies. Changing your mix between bonds and equities would be ill-advised. Timing when to get in and out of markets is notoriously difficult. If you don’t need the money today, you should hold your nerve and stick with your strategy.

Owning non-Sterling currencies in the growth assets

If the pound is hit hard, it’s worth remembering that the overseas equities that you own come with the currency exposure linked to those assets. Remember too that a fall has a positive effect on non-UK assets that are unhedged. The bond element of your portfolio should generally be hedged to avoid mixing the higher volatility of currency movements with the lower volatility of shorter-dated bonds.

Owning short-dated, high quality and globally diversified bonds

Any bonds you own should be predominantly high quality to act as a strong defensive position against falls in equity markets. Avoiding over-exposure to lower quality (e.g. high yield, sub-investment grade) bonds makes sense as they tend to act more like equities at times of economic and equity market crisis.

Some thoughts to leave you with

Facing risk can be unsettling but we work with you to make sure your portfolio can withstand these short-term uncertainties. We know it can be difficult to avoid watching the news or hearing negative things about Brexit but try to keep things in perspective and remember how strong the UK economy is. Lean on us if you need reassurance and have faith in the structure of your portfolio.

Source: Albion

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

The value of investments and the income from them can go down as well as up, and you may get back less than you originally invested. Past performance is not a guide to the future. The investments described are not suitable for everyone. This content is not personalised investment advice, and Cooper Parry Wealth can take no responsibility for investment decisions you may make as a result of this information.