Whether the UK votes to leave or remain in the EU, the investment world isn’t set to turn on its head. This sentiment has been echoed by fund manager Neil Woodford, with him stating recently that while Brexit could cause uncertainty in the short run, the stock market faces a multitude of risks to its long-term growth rate whatever the outcome of the vote. These include high debt levels, deflation, weak productivity growth and unfavourable demographics across the developed world.
As such, whether the UK votes to go it alone or stay in the bloc, investors will still have to contend with a number of risks that could hurt the performance of their portfolios. And with the scope for interest rate rises in the US as well as a new US President due to be elected later this year, there are a number of risks facing global stock markets that need to be considered by investors.
Same as it ever was
The current situation facing the investment community is no different than it ever has been. There are risks that are known about, such as those described above, as well as other risks that simply can’t be foreseen. However, the key takeaway is that share prices have risen in the past while risks of similar magnitude were present and so continuing to invest in high quality companies at fair prices looks set to be a sound investment strategy to adopt in future.
For example, since the FTSE 100 was created in 1984 there have been a number of risks facing investors. Notably, the 1987 crash had a severely negative impact on the UK economy and sent house prices drastically lower. While they took a number of years to recover, the FTSE 100 reversed its decline of 32% within a couple of years before going on to treble in value within the next 10 years.
Similarly, the bursting of the dot.com bubble sent share prices lower by around 50% and yet they recovered in time to then fall once more by a similar amount during the credit crunch. Last year the FTSE 100 rose above 7,000 points to fully recover from the credit crunch despite facing major risks such as a commodity crisis, a slowdown in China and weak growth from the Eurozone. As such, it’s clear that share prices can rapidly rise even though they continually face risks to their future performance.
Due to this fact, it seems obvious that the risks investors currently face shouldn’t deter them from investing for the long term. In fact, waiting for less risk to be clear before investing would most likely lead to investors sitting on the fence for their whole lives while inflation gradually eats away at the real-terms value of their cash.
So, while Brexit may cause a short-term wobble in share prices, we as investors always face a wide range of risks. Finding the highest potential rewards given the circumstances seems to be a sound strategy to adopt now and over the coming years.
