According to the PM, Boris Johnson, the UK’s departure from the EU is imminent: unless a new political development happens, 31 October is the official date we’re due to leave.
So how can investors diversify away some of the risks associated with a no-deal Brexit scenario. This article will be followed several others so that I can offer a detailed discussion of what investors may expect in case the UK crashes our of the EU without a trade deal.
Uncertainty for investors
For the average investor, Brexit has brought uncertainty and at times worry. Nonetheless, I do not think political events should get in the way of a long-term investment strategy.
In other words, if I am happy to hold a company’s shares for the next five years, then Brexit, or any other external event, should not make too much of a difference in my portfolio holdings.
Furthermore, any potential weakness in a sector may give me an opportunity to buy dips in shares that might have been expensive to consider beforehand.
That means August may be an appropriate time for most investors to analyse their holdings to see if they remain happy with their portfolio companies, as well as deciding what they may like to put on their shopping list.
Investors may also want to consider exchange-traded funds (ETFs) or tracker funds for their portfolios. Both are passive investments that track a particular index without attempting to outperform it.
If you’d like to have domestic exposure, but are rather worried about selecting individual companies due to increased uncertainty an industry may face, then you could buy into a FTSE 100 tracker fund.
And the pound slides
In November 2018, the Bank of England issued a stark warning over the economic effects of a ‘no-deal’ Brexit. Governor Mark Carney saying that such a scenario could send the pound into a double-digit plunge.
In fact, since the 2016 referendum, the pound has dropped sharply in value against other major international currencies. The daily gyration in sterling has, in effect, become a proxy for the confidence (or lack of it) of investors in the UK’s economy’s ability to function successfully without EU membership.
And anyone who has taken a holiday in eurozone this summer would have felt the effects of the falling pound.
Yet, it is harder to fully quantify the effect of currency fluctuations on the wider economy, as well as the share prices of UK-listed companies.
Many investors would argue that a falling pound is good news for the economy, as our exports become more competitive. A fall in the pound also increases the value of companies’ overseas earnings.
Yet weak sterling makes everything we import from overseas more expensive. In other words, if our exporters use imported raw materials, then their costs go up.
For those investors who may feel overwhelmed by the effect of fluctuations in the pound in the short run, I think an ETF to consider could be the FTSE All-World ETF, tracking the performance of a large number of stocks worldwide. By having global exposure too, UK-based investors may be able to decrease the short-term adverse effects of the home bias in these uncertain times.
