Your Autumn Newsletter 2018

How Brexit is shaping the investment marketplace


Brexit was never going to be straightforward, but as we move into the final six months before the UK will officially leave the union, most people assumed that the landscape of post-Brexit Britain would be a little clearer by now.

Understandably this uncertainty is having a knock-on effect on financial markets, leading some investors to raise questions about exactly what action they should be taking. In this article we look at some of the most common questions we get with the intention of demystifying some of the wider implications of Brexit and how investors should react.


Why is the investment market currently so volatile?

Volatility isn’t necessarily a bad thing. Throughout 2017 countless economists and investment managers bemoaned the lack of volatility in markets. A lack of volatility may cause some to think the market is becoming complacent. We would say It is somewhat reassuring to see the stockmarket react to both positive and negative news in the way that you would expect, as long as we understand the reasons behind it.

If we look at the UK stockmarket, Brexit is definitely playing its part. As we get closer to the deadline, the UK’s negotiators are going to have to decide which demands they are willing to let bend, or even break, in order to reach an agreement. From a business perspective, the vagaries of the ‘deal’ are becoming less important as the deadline gets closer. It is more important that any agreement is reached removing the uncertainty that has been responsible for much of the recent volatility.

Not all the recent volatility has been caused by Brexit and there are many other issues currently playing their part in market volatiilty. Trade tariffs around the world, along with isolated issues in certain Emerging and European countries are all contributing to current uncertainty around the globe. However, none of these issues in isolation will be sufficient to bring about a global sell-off in markets. When we look below the surface noise and seek out the fundamental economic and company data, there remain many reasons to be positive.


How is Brexit going to affect my investments?

There are two very distinct possibilities in terms of the outcome of Brexit, each with their challenges, but also both with their potential benefits to the UK stock market. Most importance now is that we see a conclusion to the negotiations and we map out what both the UK and Europe will look like in the years ahead.

An important point to note is that many companies listed on stock exchanges around the world are not entirely domestically focussed in their business operations and therefore affected by domestic events. For instance, over three-quarters of the revenues of companies listed in the FTSE100, are not generated in the UK.

Should we see a soft Brexit, which continues to look most likely, then businesses can begin to enact action plans to reorganise accordingly with the lowest level of upheaval for companies and markets. Companies will have plans in place for either outcome, and there will be very little, if any, desperate scrambling in boardrooms around the country in reaction to any Brexit agreement.

If negotiations go the other way and we end up with a no-deal or ‘hard Brexit’, then it is likely we will see more volatility in the short term. However, this should not be viewed as an event coming out of the blue and catching the investment world completely unaware. Yes, March 29th is the ‘deadline’, but this is not a repeat of the EU Referendum with immediate shockwaves. Should we be heading towards a no deal Brexit then we would expect that fund managers will have enough forewarning to react accordingly.

The more likely impact of a no-deal Brexit is a continued devaluation of Sterling. Whilst this may sound like an ominous warning, it actually presents good news for those international exporters in the UK, who’s products suddenly appear that much cheaper versus global competitors.

No matter what the result of the Brexit negotiations, we have not seen the end of the volatility in UK markets. The best news we can hope for is a swift conclusion to the talks and the end to all of the uncertainty currently hovering over the UK.


What is the short / medium / long term outlook for my investments?

As much as it may sound counterintuitive, short term volatility is of little consequence to the long-term investor. If you have no intention of drawing on your capital to meet a specific financial commitment in the near future, then all of this volatility becomes unnecessary noise. The more important aspect of volatility is to attempt to spot a trend below the surface.

Financial markets move in cycles, but some cycles take longer than others. There will be another global downturn at some point on the horizon, this fact is unavoidable, and the exact timing and likely cause is the subject of much debate. Likewise, a recovery from the next downturn is also a given, and as such investors concerning themselves with the immediate, rather than the long term, can lead to rash decisions that can come back to haunt them.

The recovery from the 2008 financial crisis has undoubtedly gone on longer than most economists predicted. In the medium to long term we remain confident that global growth will continue, and investors will reap the rewards. Downturns have several negative short-term implications, but they also have some positive effects. Companies look closer at their operations and balance sheets in order to remain solvent, putting them in stronger positions for when the recovery comes to fruition.

Throughout all of this, the important aspect is to ensure your investments are well diversified portfolio that is reviewed and actively managed within your agreed risk profile focussed on your medium to long term objectives. Focussing on the overall strategy will help tune out the short term noise.


Should I come out of the market, or invest more?

It is never advisable to invest beyond your means, or to break a long term financial plan to chase short term gains. If you have excess capital available for investment, then there may well be an argument for increasing your investments, but only if it complements your existing financial plan.

On the flip side, as we have established, short term volatility is no reason to panic or withdraw funds if markets have fallen. This only serves to capitalise the losses.

History shows the benefits of an actively managed portfolio, and the importance of diversification in your investments and the importance of not ‘having all your investments in one basket’. Diversification in most portfolios is through different asset classes and geographical regions. The benefit of these diversified portfolios is that they combine a variety of uncorrelated assets, removing focus solely on the stock market. This ensures your investments can tread a smoother and steadier path, as some asset classes (such as Absolute Returns and Fixed Interest) generate positive returns when the stock market is falling.

At Financial Advice Centre we continue to meet in our monthly investment committee, to review and analyse the performance of the vast array of fund managers available ensuring all our investments are actively managed and adhere to the principles outlines above. For more information regarding your own investments, their risk and asset allocation please contact your Adviser who will be pleased to discuss this further with you.