Blog

Brexit and investments

18th Jun, 2019

By Robert Little

It is around 3 years since the UK voted to leave the European Union, in a move which divided the nation.

The new deadline of October is fast approaching but there is a lot to come in the meantime. We do not have a Prime Minister and the potential candidates have somewhat mixed views on what will happen if we get to the deadline without a satisfactory deal in place. So what does all of this mean for investments?

Back to basics

The good news is that, as long as your portfolio is well diversified, events such as Brexit might not have too much impact on your investments. However this will only be true if your investments are spread across different geographic areas, different companies, different company sectors and different asset classes.

It is often said that the only free lunch in investing is diversification. Spreading out your money, so you don’t have all your eggs in one basket can improve long-term returns while also reducing risk. This is true regardless of events such as Brexit.

Do not take diversification for granted though. I regularly meet new clients who assume their portfolio is well diversified because it invests in lots of different companies. However, after I analyse their investments, it turns out all of their money is in a single fund which invests exclusively in UK company shares (or something similar).

Will investments rise or fall after Brexit

Unfortunately, nobody knows. There are too many possible outcomes on the table to be able to make an informed guess.

There could be a no deal Brexit, a Brexit with a trade deal in place, or no Brexit at all. Each scenario will have a different effect on the UK economy in the short, medium and long term.

The type of investments you hold will make a big difference – for example a fund which invests in UK government bonds will move in a very different way than a fund which invests in Japanese shares, regardless of the Brexit outcome.

The bigger picture

Most investment managers are focusing less on Brexit and more on the wider global economy. The current hot topics are:

  • Interest rate changes in the USA
  • The USA/China Trade War and
  • The health of the Chinese economy

Each of these factors has had quite a significant impact on even a well-diversified portfolio the last 12 months.

You will notice that Brexit is not mentioned in this list. The reason for this is fairly straightforward: global financial markets are interested in factors which have an impact on the global economy and the UK does not have much impact from an economic perspective.

The US economy is the largest in the world, followed by China. While the UK economy is large, it is nowhere near the size of the US and China. To be more specific, in 2012 the economic outputs of the USA, China and UK were $16 trillion, $8 trillion and $2 trillion respectively. Also the value of company shares in the USA makes up around 40% of the total value of worldwide shares whereas company shares in the UK only make up around 5% of the worldwide total.

As a result of these two facts, any events which affect America and China have a direct impact on investors around the world (even for people who do not have money invested in either country). In contrast events such as Brexit have relatively little impact on investors around the world.

Summary

While Brexit will have a potentially big impact on our lives and our economy (including holidays, property prices, trading partners, etc) your investments might not be affected in the same way. To find out how much you might be affected you need to consider where your money is invested – if you have a well diversified investment portfolio you might find that events outside the UK have a greater impact than events in the UK.

As I have already mentioned, many investors assume their money is well spread out when it actually isn’t. This can be the case whether you picked the investments yourself or took professional advice. Putting this right could have a significant impact on your long-term investment risks and rewards.

If you are interested in reviewing your investments please get in touch to book a free initial meeting with one of our advisers. They will assess the investments you currently hold, compare this against what they feel you should hold, and recommend changes if they are required.

To book a meeting please call 01642 477758 or visit our Contact page

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