A view on Brexit and the financial markets

It is easy to feel rattled with the continued political wrangling around Brexit in the UK, faltering trade talks between the US and China and the possibility that global economic growth is cooling.

At such times it’s important to ignore “noise” and focus on facts and long term investment goals. Remaining invested for the long term is important. This is illustrated by data from the June edition of JP Morgan’s quarterly “Guide to the Markets”. If you had invested £5,000 at the beginning of 1986 purely in the FTSE All-Share and reinvested all dividends, by the end of June 2019 your investment would have been worth £102,243, thanks to the power of compounding.

Compounding occurs because the investment returns are generated from both the initial investment of £5,000 and the re-investment of dividends, which increases the overall amount invested. It is very difficult to time markets and cutting in and out can reduce your return over time, especially if you sell at the bottom of a market cycle and then buy back when assets are more expensive. 

The UK stock market is home to many companies which pay dividends and the FTSE All-Share currently has an impressive dividend yield of 4.3%, especially in comparison to the US where the dividend yield on the S&P 500 is 1.88%. This is why our model portfolios include exposure to carefully selected UK Equity Income funds. Dividend yields have been growing in Asia Pacific, Emerging Markets and Japan and our portfolios also have exposure to income strategies in these sectors. 

The FTSE 100 is up 35.5% since the EU referendum in June 2016 (as of 10^th September 2019). That is not to say we are complacent. We reduced exposure to UK equities within our portfolios last year and we are closely monitoring the developments around Brexit and the possibility of a “No Deal” Brexit.

We have looked into the possible impact of a “No Deal” Brexit on investment markets and our model portfolios in depth. In the event of “No Deal” the industry sectors which are most likely to be impacted are financial services, transport and broadcasting. This is because the affected companies could lose “passporting” rights into the EU market until such time as a trade deal is reached, although provisions to prevent disruption could also be agreed.

Customs and regulatory checks could come into play with the most affected sectors likely to be food & agriculture, chemicals & pharmaceuticals and transport & travel services. However, given the high stakes involved for both the UK and EU it is possible that a “grandfathering” arrangement could be reached or a transition period agreed in mitigation. We have checked the portfolios of our UK and European funds and although they have some exposure to these industry sectors they remain well diversified overall and have exposure to both domestic and internationally-focused companies. 

At the macroeconomic level, in the event of no-deal, it is possible that the Bank of England would cut interest rates, which would be supportive to both equities and bonds. Inflation is a risk if imports become more expensive, but as discussed above, steps may be taken to keep trade flowing both ways. The consensus view is that Sterling would decline against other currencies in the event of “No Deal” and this would assist the FTSE 100 because the companies which make it up primarily earn their money internationally. Their revenues would increase simply due to Sterling being weak and getting more Pounds back, once converted, for each Dollar or Euro earned. Most of our UK fund choices are tilted towards investment in FTSE 100 companies.

This article is supplied by Mutual FM and for information purposes only.  It does not constitute investment advice and is not a recommendation to invest.  The value of your investments and the income from them may go down as well as up and you could get back less than you invested.

Photo Credit