With Theresa May’s Brexit deal proving to be relatively unpopular among MPs, the coming months could prove to be a volatile period for UK investors. The prospects for the economy could be called into question – especially if a ‘no-deal’ scenario becomes increasingly likely, while a change in Prime Minister, or even a change in government, cannot be ruled out.
Meanwhile, the pound could weaken, and this may present challenges for UK consumers and businesses, as well as opportunities for exporters.
As ever, it may be possible for long-term investors to capitalise on the current situation. Here’s how I’m planning on approaching what could be an interesting period for UK investors.
UK shares
While companies that generate a significant portion of their sales from within the UK may become increasingly unpopular over the coming months, this could present a buying opportunity for long-term investors. Although Brexit may lead to a period of disruption, various economists believe that, in the long run, it’s unlikely to make a significant difference to GDP growth – even in a no-deal scenario. As such, low valuations in sectors such as retail could lead to high-potential rewards in the long run.
By spreading the risk throughout a wide range of sectors, and focusing on companies that have sound balance sheets and strong cash flow, it may be possible to obtain favourable risk/reward ratios for the long term.
International stocks
Clearly, Brexit is a known unknown. This means that it’s impossible to accurately predict how various scenarios will ultimately unfold. As a result, it may be prudent for investors to avoid being 100% focused on the UK through owning stocks that have exposure to a variety of economies across the globe.
Such stocks may be less impacted by Brexit volatility than other, more UK-focused shares. They may therefore have less risk attached to them. Likewise, they may also offer stronger rates of earnings growth as a result of increasing wages and GDP growth in countries such as India and China, while the US economy continues to offer impressive growth forecasts over the next couple of years.
Fundamentals
During periods of volatility, perceived weaker stocks can be hit the hardest due to investors adopting an increasingly cautious stance. This could mean that stocks with higher debt levels, weaker cash flow, or a poor track record of performance in uncertain economic periods, may experience a higher level of volatility than other companies.
As such, it may be prudent to focus on a company’s fundamentals and consider how well it could survive in a period of economic difficulty. Since consumer confidence is already relatively weak, and there could be increasing fear about Brexit in the coming months, businesses that are perceived to be more resilient during such periods could outperform their industry and index peers.
Therefore, while Brexit may cause some disruption in the near term, it may also offer investment opportunities. Focusing on risk, as well as return, could help investors to capitalise on potentially volatile stock markets over the coming months.
