On finding out what I do for a living, people used to ask me if they should buy shares in BP or Facebook or an obscure uranium miner I’d never heard of.
Not any more.
Today all anyone asks about is Brexit. What will happen to shares, pensions, and house prices if we leave the European Union as planned on 29 March 2019? What might benefit if we don’t?
I never liked giving off-the-cuff opinions about shares, especially those I haven’t researched properly. Would you ask a brain surgeon you met in the pub if you should have a lobotomy to cure your migraines?
True, it’s not quite the same thing – but there’s a responsibility in influencing how people invest their hard-earned money.
Worse, they always remember your stupidity if they push you into giving an opinion on a company that turns out to be wrong. And, of course, they only remember their genius if the shares go up!
Frustrating though on-the-spot stock picking might be, it’s a doddle compared to Brexit and investing.
Brexit means almost anything
It seems fair to say that after the tumult that met the White Paper on our proposed withdrawal from the EU, all scenarios from Hard to Soft to No Brexit still seem very possible.
We could see a change of government, too, from the right-leaning incumbents to a Labour administration set to nationalise some industries and direct public money away from others.
This range of outcomes means the sensible answer to the Brexit conundrum is to be well diversified. Not just across different companies but also across different stock markets, currencies, and other asset classes such as bonds and gold.
Sounds easy? The tricky part is assets that may rally in say a Super-Hard No Deal Brexit may do poorly in a Soft or No Brexit. And vice-versa.
And people don’t want to hear that, in my experience – or at least not those who ask strangers for advice. They seem to want a magic asset that only goes up!
Sunglasses and raincoats
For instance, I might suggest that in some Brexit scenarios the pound will probably fall – from its already low base – against other currencies.
It could be helpful therefore to own foreign assets like say an S&P 500 index fund that tracks the US market – or even a basket of big international British companies that earn most of their money overseas.
Unfortunately, in other contrasting Brexit scenarios, it’s easy to imagine the pound rallying off today’s cheap-seeming levels. In that case, foreign assets – or foreign earnings – would soon be devalued in sterling terms.
So that’s why I think the solution is to diversify. Own both UK-listed and overseas assets, and a rise in one from currency moves should offset some of the declines in the other.
This seems the safest approach to the uncertainty of Brexit. But the average person doesn’t want to invest in something with the potential to go down! Sadly, that’s a pipe dream – at least from a global perspective.
Cash is a cop out
Even if you keep all your money in cash at the bank, it could be devalued if Brexit goes off the rails or there’s some political crisis and we see a run on the pound.
Your money in the bank might have retained its nominal value, but now you can only buy half a pizza on your Italian holiday with the same amount of pounds.
Or what if we saw higher inflation as the pound fell and the cost of imports rose, but the Bank of England felt unable for some reason to raise rates in response?
Again, the value of your supposedly safe cash could be eroded, in real terms.
Conversely, if the eventual outcome is a muddle-through scenario that kicks any ‘real’ Brexit into the long grass, the pound could rally – but so could other assets such as UK commercial property funds.
This time you’d miss out on gains by sitting in cash.
The long and short of it
To be clear, I’m talking about the short- to medium-term outcomes of Brexit here.
If you think a Clean or Hard Brexit would be great for the UK economy in the long term, you may want to hold sterling assets and to be underweight other global markets. You could even try to pick British firms that you feel can best exploit new trading arrangements with the rest of the world.
However, in the short term any truly big changes would cause inevitable disruption. The idea is to try to insure your wealth against Brexit outcomes that send your portfolio lower, perhaps even as the rest of the world continues to motor to new highs.
