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Brexit: back on the bandwagon

Rebecca Cretney explains that Brexit may be hitting UK headlines, but it is not a global theme for investors to worry about unless their approach to wealth management has left them exposed.
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Published 29 September
4 mins

Brexit ‘news’ is once again hitting UK headlines, as the likelihood of a hard Brexit increases. Whether it is a ramp-up in rhetoric to push the negotiations over the line, or whether the Internal Market Bill really has damaged the EU’s view of the UK more permanently, only time will tell.

Be there a deal or be there none, there have already been and will continue to be economic ramifications for many years to come. The key question for us to consider is: what does that mean for our investments? After all, there are many occasions when economic performance is not reflected in stock markets and vice versa.

 

Given we cannot divine the future, the role of a wealth manager is to analyse what’s happening, assess the ramifications and whether these have been ‘priced in’ to the markets, plot a number of ‘what if’ scenarios and then weigh up the probability of each.

 

We then look at the various investment options and seek to chart a course between the most likely scenarios, implementing an investment strategy that is able to minimise expected risks and maximise opportunity. But just how big a consideration is Brexit?

If you live in the UK, or have substantial assets there, then Brexit is probably the biggest issue of the moment and you will see significant Brexit news flow on a daily basis. However, when Brexit is viewed through a global lens, it is in fact a localised issue. The UK is about 5% of global equity and around 7% of fixed income markets. If you have substantial exposure to the United Kingdom through your residence, your employment, your business interests or your assets, then we would argue that your portfolio should not be skewed towards the United Kingdom as well. The rationale is simple: to avoid significant concentration of interests in one country and diffuse risk by investing globally.

The rest of the world views Brexit as a local issue. There is a popular expression that when the US sneezes, the rest of the world catches a cold. The UK does not have that influence. But if you look at a typical UK portfolio, it is likely that significant percentages will be invested in the FTSE 100 and FTSE 250. The returns of these portfolios will be heavily dependent on Brexit.

 

We think it is therefore important to emphasise that our portfolios do not have a regional bias to the UK and, instead, are positioned according to our views on the global investment landscape. As such, UK assets are only one relatively small part of that landscape in normal times. Given the current combination of heightened risks and the lack of clear opportunities, that exposure to the UK has been substantially reduced. For example, our growth portfolio has a 5.4% allocation to UK equities and our balanced portfolios have 2.9% in UK stocks.

Currency is also an important consideration, particularly for global investment managers such as ourselves. We have minimal Sterling exposure in non-Sterling portfolios. While Sterling could appreciate in value over the long term, at present and over the medium term the upside to the Pound is limited given there is currently no real single (or positive) scenario that would realistically take us back to previous ‘average’ levels (i.e. GBP/USD 1.50 any time soon). After the 2016 Brexit vote worked its way through markets, the Pound ended up at US$1.28. Guess where it is now?

 

Over the short and medium term, the Pound could weaken even further against both the US Dollar and Euro. However, this doesn’t necessarily detract from performance either. In fact, for our Sterling strategies, a weaker Pound (as a no deal Brexit becomes more likely) typically boosts performance, as we have not hedged out all the other currency exposures from our portfolios as part of our tactical view on currency.

Meanwhile, although a soft Brexit would strengthen Sterling, it is also likely to trigger a rally in risk assets as they heave a sigh of relief. Rising share prices would offset the drag of the other currencies.

 

Throughout any event that hogs the headlines, we seek to maintain a long-term focus. As such, we aim to tune out the highest-frequency drama and only assess the potential of the most significant developments on investments. And, all the while, we are also monitoring the markets for any long-term opportunities that might present themselves in the short term to be snapped up.

 

As it is unlikely that the UK’s news channels, social media feeds and conversations will be dominated by the US-China tit-for-tat actions, or the possibility of a contested US election result, any time soon, I leave you with three thoughts:

  1. As global investors, we diversify our portfolios across asset types, companies, sectors, industries, geographies, manager styles, as well as currencies. Clients’ portfolios are about as anti-Sterling as they can reasonably be, but are also diversified against the other events currently being kept off our front pages by Brexit.

  2. While Brexit will continue to dominate the headlines, in investing terms it is a short to medium-term phenomenon. Short-term noise can cause minor fluctuations in portfolios, but the impact on long-term global financial markets would be minimal.

  3. While seeking to minimise the risks, there is the constant review of new opportunities, and the management of new risks, so that portfolios are actively positioned to be able to take advantage of any opportunities that surface.

So yes, worry about Brexit and what that might mean for the UK as a country, or next year’s holiday, and whether a US trade deal may mean chlorinated chickens in UK supermarkets, but you don’t have to spend too much time thinking through its ramifications for portfolios. We’ve already got that covered.

Clients of Nedbank Private Wealth can get in touch with their private banker directly to understand how goals-based investing can help, or call +44 (0)1624 645000 to speak to our client services team.

 

If you would like to find out more about how we can help clients manage their investments, please contact us on the same number as above, or complete a form using the links towards the end of the page.

Investments can go down, as well as up, to the extent that you might get back less than the total you originally invested. Exchange rate changes also impact the value of your investments. Past performance is no guide to future returns. Any individual investment or security mentioned may be included in clients’ portfolios. They are referred to for information only and are not intended as a recommendation, not least as they may not be suitable. You should always seek professional advice before making any investment decisions.

about the author

Rebecca Cretney

Rebecca Cretney

Rebecca joined Nedbank Private Wealth in May 2004 having moved to the Isle of Man from Barcelona to pursue a course in Business Studies with the Isle of Man Business School. Rebecca was appointed to the role of investment counsellor in March 2019 to focus exclusively on the company’s discretionary investment management services.

 

She works closely with our teams of private bankers to provide support in advising our clients with integrity, and to give additional technical investment expertise where more complex portfolio requirements exist.

 

Rebecca is a Chartered Fellow of the Chartered Institute for Securities & Investment and a Chartered Wealth Manager.

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