Brexit is a risk which investors have had over two years to plan for. However, since the end result still seems to be no clearer than the day after the referendum was held, it’s proving to be a challenging threat for investors to overcome.
Of course, Brexit comes at a time when risks facing the wider global economy are high. This may mean that simply avoiding UK-focused shares is not a sound move, since global stocks may be impacted by challenges such as a rising US interest rate and a potential US-China trade war.
For many investors, though, Brexit could present a buying opportunity. While there could be volatility ahead – especially for UK-focused stocks – in many cases this may already have been factored into valuations.
The valuations of a range of UK-focused shares suggests that investors are expecting further challenges from Brexit. A number of banks, retailers and other industries contain companies that, in many cases, have solid balance sheets and track records of growth. However, since investors are concerned about Brexit, such companies are trading on low valuations at the present time. This could present investors with a strong buying opportunity. However, the coming months could see such stocks exhibit significant volatility, depending on how the Brexit process moves ahead.
Of course, for investors with a long-term timeframe, such volatility may not prove to be a major concern. Stock markets, such as the FTSE 100 and FTSE 250, have displayed a significant amount of volatility in the past, but have always risen to post new record highs. Therefore, while Brexit may seem to be a potential problem for investors in the short run, the reality is that it may offer the chance to generate higher returns in the long run.
That said, diversifying geographically is always a sound idea. Not only does it reduce risk, it also provides the opportunity to access higher rates of growth in different parts of the world economy. At the present time, for example, the emerging world continue to offer high growth rates, while the US economy is generating improving GDP growth. A number of shares in the FTSE 350 could offer exposure to such regions, thereby improving the risk/reward ratio of an investor’s portfolio.
Although a variety of risks face the world economy, the pullback in stock prices since last May suggests that investors have priced them in, to at least some extent. As such, and with share prices now appearing to offer wide margins of safety, it could be a good time to invest. As history shows, periods where valuations are low and risks are high often prove to be the best moments to buy. With both of those facets appearing to be in play at the present time, buying shares with Brexit just around the corner may prove to be a shrewd move.