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UBS SmartWealth

Insight

Can you invest to beat Brexit?

One of the conundrums facing UK investors is whether they should hold off investing in stocks and shares until the uncertainty surrounding Brexit is resolved. We investigate the options…

Barely a day goes by without Brexit dominating the UK’s TV news and the newspaper front pages. With the deadline of March 2019 inching inexorably nearer, not even game show host Noel Edmonds would be able to predict exactly what the final ‘deal’ will look like on how the UK leaves the European Union (EU).

Brexit may have significant implications, not just for people living in the UK but for our EU partners as well.

Brexit may have significant implications, not just for people living in the UK but for our EU partners as well. These could include all sorts of practicalities such as where people are allowed to work and rules regarding travel. Thankfully, progress seems to be being made, with ‘phase one’ of negotiations – the so-called ‘divorce settlement’– having been approved by the 27 EU leaders in December 2017.

But two key concerns for investors are how the remaining negotiations and the end result of Brexit might affect their portfolios and whether they should change their investment strategy as a result.

Should you play safe?

Is it possible to benefit from Brexit if you make the right investment choices? A common reaction from investors when times get tough is to take capital out of equities and plough it into assets traditionally thought of as ‘safer’ – for example cash, gilts and bonds. But this may not be the best strategy, for several reasons.

First, it’s worth remembering the adage, ‘It’s time in the market, not timing the market.’ By taking your money out of an investment you may avoid some of the market falls but you may also miss out on the rises, and of course on any dividends. Investments are usually for the long term, which generally smooths out the ups and downs of market activity.

Second, when it comes to whether you can benefit from events such as Brexit, it’s worth remembering another adage: ‘You can’t beat the market.’ According to Dean Turner, Economist at UBS: ‘Taking money out eliminates the chances of benefiting from the opportunities. The best strategy is to stay invested but diversify to minimise risk while maximising opportunity.’

Some might be tempted to ‘trade around’ to try to avoid equities that might be affected by Brexit, but those new to investing may find they unwittingly incur charges and make less well-informed decisions.

How will Brexit affect stock markets?

This is the million-dollar question. And no one has a definitive answer. When the UK voted in the referendum on 23 June 2016 to leave the EU, some predicted that UK financial markets would plummet. Yet between 24 June 2016 and 4 December 2017 the FTSE 100 rose by 19.9%(1). That said, the MSCI All-Country World Equity Index, which provides a broad measure of world equity market performance, rose by 29.8% during the same time frame(2). If you had taken your money out of equities and put it elsewhere the day after the referendum, then you would probably have missed out on the subsequent rise in the market.

Likewise, when Article 50 was triggered on 29 March 2017, starting the official Brexit negotiation period, many expected the markets to suffer but they remained relatively flat to 4 December that year. And during this time those who invested for dividend yield would still have made a positive return.

With markets not reacting as many expected, all of this goes to show that it is (almost) impossible to predict how things will play out after 29 March 2019, until the final deal has been reached between Europe and the UK.

As Dean explains: ‘There are so many factors that affect the stock markets. Over the long-run corporate earnings are what matter most, but in the short-term sentiment can be swung around by many factors. These include employment figures, GDP, inflation, fiscal policy, interest rates, currency fluctuations and the global economy. Brexit is just another factor to consider. What’s more, Brexit itself should be relatively localised and while the impact on the UK economy is as yet unclear, the global implications should be significantly less.’

So where should you be investing, if you’re taking Brexit into consideration?

Regardless of Brexit, your investment strategy should be based on factors such as your age, disposable income, investment goals and attitude to risk. This should generally be the case, rather than trying to second-guess the market.

Your investment strategy should be based on factors such as your age, disposable income, investment goals and attitude to risk.

For investors looking to remain in equities and reduce any of the potentially negative impacts of Brexit, diversification is key. Investing in UK companies that have a global presence could be an option, as might investing in equities outside the UK, such as in the Eurozone and the US. This can help to diversify currency exposure as well, since currencies have a significant impact on the markets.

As Dean says: ‘Put simply, the reasons to invest on a global basis remain as relevant as ever. Global exposure to equities in the SmartWealth investments has hardly changed since Article 50 was triggered.’ It continues to be a good time to invest for your future: when interest rates are low and currency is fluctuating, a diversified approach makes as much as sense as ever. So to answer the big question: can you invest to beat Brexit? We think that this will be very difficult, but that doesn’t mean that you can’t invest in a way that protects yourself from short-term volatility, while planning for the longer term.

Sources

  1. (1)

    Yahoo Finance. FTSE 100 index closed at 6138 on 24 June 2016, and 7360 on 4 December 2017

  2. (2)

    uk.investing.com/indices/msci-world-stock-historical-data (24/6/16 to 4/12/17)

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