Whichever way one voted, it is hard not to be dismayed by the shambles that is Brexit, created by all sides. In the event that any deal agreed gets voted down in Parliament, or there is no deal, there is a material chance that the government could fall. One or both of these events would come with great uncertainty.
Wells Gibson sets out three key investment risks relating to Brexit and three key strategies embraced by Wells Gibson to help reduce these risks.
Risk 1: Greater volatility in the UK and potentially other equity / share markets
In the event of a poorly received deal or no deal, it is certainly possible that the UK equity / share market could suffer a market fall as it tries to come to terms with what this means for the UK economy and the impact on the wider global economy. A collapse of the Conservative government and a Labour victory would add further uncertainty.
Strategy 1: Diversify globally across equities / shares
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 / share 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 / shares would be ill-advised. Timing when to get in and out of markets is notoriously difficult. Provided you do not need the money today, you should hold your nerve and stick with your strategy.
Risk 2: A fall in Sterling against other currencies
In 2016, after the referendum, Sterling fell against the 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 or no deal.
Strategy 2: Own non-Sterling currencies in the growth assets
In the event that Sterling is hit hard, it is worth remembering that the overseas equities that you own come with the currency exposure linked to those assets. Remember too that a fall in Sterling has a positive effect on non-UK assets that are unhedged i.e. the investment manager is not using strategies to offset the impact of currency fluctuations. Whereas, the bond element of your portfolio should be hedged to avoid mixing the higher volatility of currency movements with the lower volatility of shorter-dated bonds.
Risk 3: A rise in UK bond yields (and therefore a fall in bond prices)
The economic impact of a poor or no deal and/or a high-spending socialist government 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.
Strategy 3: Own short-dated, high quality and globally diversified bonds
Any bonds you own should be high-quality to act as a strong defensive position against falls in equity / share 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 / shares at times of an economic and equity / share market crisis.
Some thoughts to leave you with
Even if you cannot avoid watching, hearing or reading the news, it is important to keep things in perspective. The UK is a strong economy with a strong democracy. It will survive Brexit, whatever the short-term consequences, and so will your portfolio. Keeping faith in global capitalism and the structure of your Wells Gibson portfolio, as well as holding your nerve, accompanied by periodic portfolio rebalancing is key.
‘This too shall pass’ as the investment legend Jack Bogle likes to say.