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How will Brexit affect investors?

By Mike Narouei, Content Producer at Boring Money

31 Jan, 2019

If Brexit was to work out OK, the UK stock market probably looks a bit cheap. If it doesn’t, it probably looks a bit expensive. Boring Money does what it always does in these situations and turns to the experts for advice. How do they recommend that investors face up to Brexit?

Laith Khalaf, Senior Analyst at Hargreaves Lansdown

- “It’s hard to envisage but Brexit pessimism will eventually pass, and so investors should keep their sights firmly set on their long term goals. Given the uncertain environment, diversification is even more important than ever, so that whichever way Brexit turns out, some investments in your portfolio are heading in the right direction. This means having a mix of shares, both globally and UK domestic companies, which will perform well in different outcomes, particularly given the fact the currency is so heavily linked to the Brexit outcome.
- It’s important to recognise that an improved Brexit outlook, optimistic as that may sound right now, would likely see the pound rise and that would prove a headwind for overseas investments. Meanwhile the UK stock market looks particularly unloved right now - investors have been resolutely avoiding it, which means they might not have any eggs left in this particular basket. It might be a good time to take a look at your overall portfolio therefore, and make sure your portfolio has a Brexit balance, unless you are the one person in the world who knows how this is all going to play out!”

Patrick Connolly, Chartered Financial Planner, Chase de Vere

- “We don’t pretend to know what is going to happen and so we position client portfolios so they have the best possibility of achieving their financial goals whatever does happen. We aim to manage and diversify risks through asset allocation, holding a mix of equities, fixed interest, property and cash to meet the objectives and risk profile of individual clients. If there are significant market movements, either upwards or downwards, we will rebalance portfolios.
- In the first scenario, where parliament agrees some form of Brexit deal and we leave the EU on 29 March, this is likely to be perceived as positive news by the markets and we could see a rally in domestic, mid and small cap UK stocks. However, sterling is likely to strengthen which would be bad news for many FTSE-100 companies which earn a significant proportion of their revenue from overseas, as this revenue will then be worth less when converted back to sterling. If sterling is stronger this will also be bad news for UK investors with overseas assets as they would also be worth less when converted back to sterling. Liontrust UK Smaller Companies and M&G Property Portfolio may be good options.
- If parliament can't agree a deal, and the UK leaves the EU on WTO terms on 29 March, it means uncertainty, and markets hate uncertainty. This will be bad news for domestic-focused stocks, which means most mid and small cap companies. It could also be perceived negatively for UK commercial property. However, this could perversely be good news for FTSE-100 stocks as the uncertainty would probably cause sterling to weaken and this would be beneficial for companies which earn a large proportion of their earnings overseas.”

Jason Hollands, Managing Director, Business Development and Communications at Tilney

- I would caution against hacking a portfolio around based on 'what if' political scenarios, especially given the unpredictable and fluid nature of the current process around Brexit. The main lightening rod reaction to policy events comes from the currency markets. In 2016, sterling devalued significantly, and swiftly, which reflected the fact that the markets had assumed a vote to Remain based on polling data.
- A gruelling two and a half years later, with Brexit dominating the news each day, the markets have had a lot of time now to absorb and game plan the various scenarios, and a lot of Brexit-related anxiety is already factored in prices.
- Arguably one of the main risks from here, is that the process does reach a conclusion and markets rally hard on the basis there is an anchor point to work with, whether that is a 'soft Brexit' or an agreement to move to WTO terms in an orderly fashion. Investors who have shunned UK assets could be missing out on such a re-rating or, worse still, take a hit on their overseas investments because of currency moves, reversing the effect they experienced on their US and global funds in 2016. 
- UK shares are on a notable discount to other developed markets and offering very high yields in comparison, with domestically focused companies trading at multiples more typically seen in a recession. I therefore think there are opportunities here, as so much gloom is priced in which may ultimately prove excessive.
- What I am wary about, is Gilts. Yields are frankly unappealing – negative in real terms once you factor in inflation – with little upside potential but plenty of downside risk. In a disruptive no deal scenario, especially if swiftly followed by a Corbyn victory, the UK’s credit outlook could come under pressure, leading to higher borrowing costs. That might see gilt prices weaken sharply as yields rise."

Terence Moll, Chief Strategist at Seven Investment Management

- “On the surface, the possibility of a No Deal Brexit has risen. Even if it’s an outcome that Parliament has rejected, as we get closer to 29 March No Deal becomes less unlikely, if only by mistake. To make matters worse, the Prime Minister has promised something she claimed was impossible a few weeks ago – renegotiation of the Withdrawal Agreement. Meanwhile, the EU instantly rejected reopening negotiations. In reality, the spread of outcomes remain as wide as ever.
- In the past month, the currency markets seemed to agree with our view that a consensus was building around taking no-deal off the table. The trade-weighted pound has moved up over 4%. Tuesday’s events haven’t moved the market’s thinking by much. We still think that no deal won’t happen but can’t rule it out yet. We remain overweight on the pound in the belief that Brexit won’t be disastrous. However we are not yet ready to position for a sustained rally in UK equities, so we remain underweight there.”