Brexit negotiations now seem to be moving towards their climax. The UK is set to leave the EU at the end of March 2019, and while there may be a transitional period, no deal has yet been agreed. And while there has been progress in a variety of areas, nothing is agreed until everything is agreed.
As such, the prospect of a ‘no-deal’ Brexit seems to be increasing. A few months ago, it felt like a rather remote possibility. Now, it is something which investors must realistically plan for. Could one way of doing so be to buy shares in FTSE 100 companies? Could the index benefit from a ‘no-deal’ Brexit?
While the UK economy is experiencing a challenging period at the present time, much of the world economy is enjoying a boom period. The US and China are recording relatively high growth rates, with the former benefitting from improving confidence and the latter’s ‘soft landing’ being less significant than had been previously envisaged. The EU is also performing well, with the eurozone’s members forecast to post a 2.2% rise in GDP in 2019.
Since companies in the FTSE 100 generate around three-quarters of their income from outside the UK economy, they look set to benefit from strong growth across the globe. As such, if a ‘no-deal’ Brexit causes the performance of the UK economy to deteriorate further, then it may not have a major impact on their underlying financial performance.
In fact, with a large number of FTSE 100 shares reporting in sterling, their reported earnings could gain a boost from a weaker pound in a ‘no-deal’ scenario. Confidence in the UK economy could weaken if a deal fails to be signed between the two sides, and this could cause sterling to come under pressure. As such, it could be argued that the FTSE 100 will be a beneficiary of a ‘no-deal’ scenario.
Investors planning for Brexit may therefore wish to include a number of FTSE 100 stocks in their portfolios. They could provide diversification in case the performance of UK-focused shares disappoint in future. And while the index has enjoyed a decade-long bull market, there are still a number of shares that seem to offer margins of safety at the present time.
Clearly, focusing solely on companies which operate outside the UK is not a sound idea. A deal could be signed between the UK and EU, while a ‘no-deal’ scenario may prove to have a positive impact on the economy’s outlook over the long term. As such, having exposure to a mix of stocks which operate in different regions of the world seems to be the most logical idea.
Political and economic risk is perhaps the highest level it has been for a number of years. Investors who are able to mitigate this risk through diversification could find themselves at an advantage versus their more concentrated peers.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.