Like it or not, the UK is leaving the EU. This will have significant ramifications for the future performance of the UK economy and many investors may understandably be feeling nervous following last week’s referendum result.
Due to the uncertain outlook for the UK, smart Brexiteers are likely to be seeking diversification within their portfolios. Clearly, this is a good idea in any economic circumstances, but the benefits of investing in companies that have operations outside of the UK may be more keenly felt in the coming years than ever before. That’s because with a recession in the UK on the cards as well as a weak currency, companies that aren’t UK-focused could prove to be a major ally for long-term investors.
China in your hand
One country that continues to offer an unparalleled growth story is China. Rewind to February this year and it may not have seemed like such a stunning place to invest as investors were becoming nervous about its slowing rate of economic growth. However, China’s plan to transition from a capital expenditure-led economy to a consumer-led one is very much on track and holds huge growth potential for investors who are willing to take a long-term view.
That’s at least partly because of increasing wealth in China. By 2022 it’s estimated by McKinsey that more than 75% of China’s urban dwellers will earn between $9k and $34k and this could help to expand demand for consumer goods over the medium term. As such, consumer goods companies with exposure to China could see their top and bottom lines given a major boost. Therefore, investing in UK-listed consumer goods companies that are well-positioned in China may prove to be a sound move.
Similarly, demand for other products may rise as the wealth and size of the Chinese middle class increases. Financial services firms may see demand for their products moving upwards as an increasingly consumer-focused culture becomes more prevalent and Chinese take on greater amounts of personal debt in order to fund the purchase of consumables. Furthermore, pension provision and insurance products are also likely to gain in popularity at a rapid rate, which makes UK-listed banks and financial services companies with exposure to China of great interest to smart Brexiteers.
Of course, it’s possible to invest directly in Chinese companies. Some investors may feel that this is preferable and offers a fuller exposure to what’s likely to become the world’s largest economy over the long term. However, this brings corporate governance issues to the fore, with Chinese companies arguably not having the same track record of robust corporate governance procedures as is the case with UK-listed stocks. Therefore, buying UK-listed stocks with significant exposure to China seems to be a sound compromise.
Clearly, the outlook for the UK economy is somewhat uncertain. But the effect of Brexit on sterling will turbocharge foreign earnings of companies reporting in sterling. This makes China even more appealing for long-term investors, with its growing middle-class creating stunning investment opportunities for the years ahead.
