Brexit is looming and investors will be wondering what they should be doing to prepare for what may lie ahead. Despite numerous swings in sentiment since the referendum, it’s clear to say that investors have been seriously spooked.
The latest figures from the Investment Association show that investors have pulled £10.8bn out of UK funds since the referendum. As an aside, this may have been a savvy move as only two funds in the UK Equity Income sector have delivered a positive return this year – Schroder Income and Schroder Income Maximiser – all others have handed investors losses.
However, it’s important to maintain a long-term view. It’s worth reminding those who deliberately pulled out of the UK, not to confuse the UK stock market with the domestic economy. The London Stock Exchange is very international and around 75% of the earnings of FTSE 100 companies is made outside of the UK, primarily in US Dollars.
Hard or soft?
Since the Brexit vote was passed, there has been much debate about what kind of exit we’re going to make. However, recent greater parliamentary control over the process is expected to lead to a softer withdrawal from the EU, and that in turn is seen by the market to produce a better economic outcome. A soft Brexit could result in a bounce of domestically focused stocks, such as Marks & Spencer, ITV and Taylor Wimpey.
A harder, less organised exit will mean that stocks that derive a large chunk of their earnings from overseas, like Rio Tinto, Royal Dutch Shell, Unilever, and Diageo might do well because a falling pound boosts the value of the profits they make in dollars, euros, yen and yuan.
Defensive stocks are usually favoured in troubled times. Such companies offer goods and services people would buy regardless of economic conditions. For example, Unilever is a stock often held by investors for its defensive characteristics, as it sells products such as shampoo, for which there is a constant demand, making the revenue relatively secure.
Yet a ‘no deal’ scenario could of course be particularly detrimental to domestic stocks. There’s still a wide range of outcomes from the parliamentary process, and there’s still a long road before we have a definitive direction for Brexit. Whatever happens, the bottom line is that all the old rules apply — diversify, diversify, diversify and maintain a long-term view, so that whichever way Brexit goes, your portfolio can handle it.
The investors that have been selling out of UK equity funds in recent years may leave some of them under-exposed to this area. This will probably serve them well if we get what the market deems to be a bad Brexit, but they may find themselves left behind if our withdrawal from the EU turns out better than expected.
Overall, market downturns are an inevitability, but good fund and stock selections will help protect you over the long term.