The various twists and turns in the Brexit saga have held the attention of the British public, press and markets for over four years. Last winter, it looked like progress was finally being made – we even lauded the fact that a deal had finally won a vote in the Commons.
Indeed, that period seems like a distant memory now, with lengthy negotiations with the EU leading investors to feel less certain about the UK’s long-term prospects – not to mention the other issues that investors currently have on their plates!
Mid-October saw an escalation in ‘no-deal’ rhetoric, but there should soon be more clarity on what the UK’s trading relationship with the EU will look like. But, while the result is undoubtedly important, its impact on investors in the UK might not be as dramatic as some people think…
The COVID-19 effect
While Brexit has also played a role in holding back the UK stock market, the coronavirus pandemic has overshadowed the talks’ impact, and there are other factors that are currently affecting returns, for example the US Presidential Election is a major source of ups and downs.
Focusing on COVID-19 though, and the context of the pandemic is much more significant for investors than Brexit. Britain’s GDP shrank by 20.4% in April after the first full month of lockdown1, and although recovery is underway, the economy will be battling the effects of the pandemic for some time. Rishi Sunak, the Chancellor, this week argued that controlling national debt and spending is the government’s key task ahead.
The pandemic has already pushed many UK companies into withdrawing dividend payments. Large UK companies have traditionally paid high dividends relative to those in other countries. However, with many firms facing lower earnings this year, lots of them have postponed or reduced these payments, which has been challenging for overall investment returns.
Deal or no deal?
The difference may be actually smaller than it seems! By leaving the EU’s Single Market and Customs Union, the UK has already opted for a Brexit that is at the ‘harder’ end of the spectrum, points out Capital Economics. The firm argues:
“As the differences between a Brexit deal and a no-deal are not as big as they once were, the economic costs of a no-deal have diminished.”
Capital Economics estimates that a ‘cooperative no-deal’ between the UK and the EU would cause the pound to fall, inflation to rise, and for GDP in 2021 to be around 1.0% lower than if there were a deal. It adds that the Withdrawal Agreement has already laid down some terms for the separation, and that progress has been made on financial services equivalence.
The difference would be more striking in the event of an ‘uncooperative’ no-deal, the economists argue: “The bigger risk is that relations between the UK and the EU deteriorate to such an extent that both sides start to unravel the agreements already put in place”.
If the talks do unravel acrimoniously, then there would be a greater hit to GDP, more inflation, and the pound would weaken more, they suggest. Arguably, the EU’s legal challenge to the UK over its Internal Market Bill has made this outcome slightly more likely than it was over the summer.
In our previous article about the US Election, we stressed the importance of taking a long-term view – even in times of crisis – and the same goes for Brexit. Take a step back and evaluate your investment performance in the context of long-term objectives.
The UK’s longer-term prospects beyond both COVID-19 and Brexit talks will be driven by policy decisions in the coming months, suggests Arnab Das from Invesco, which manages several funds for St. James’s Place:
“Freed from the guard rails of the EU’s regulatory framework in many areas, focus will shift to the Johnson government’s economic, financial, tax and industrial strategies as it returns to the ‘levelling up’ agenda – and above all, whether the UK’s traditional strength as an open, predictable, free-market economy is enhanced or weakened.”
He adds that in the longer term, he “would expect the UK government to gradually find its way through fits and starts to decent policy choices, unlocking some of that value and restoring a bit of lift to growth.”
Ultimately, investors should remember that the overall risk of Brexit disruption is lower in a diversified portfolio, than if invested in the UK alone. Taking a diversified approach is a brilliant way of sheltering your investments from any market turbulence created by Brexit (or other events) – i.e. by investing in lots of different companies, asset classes and geographical areas. The theory is that, while all your investments may not go up at the same time, they won’t all go down together either.
Fund managers tend to invest across a range of regions, notes Gavin McGhee, a Wealth Management Consultant at St. James’s Place:
“A number of our fund managers say ‘whilst we talk about Brexit in our interviews, when it comes to our investment decisions, when you look around the globe at international businesses, this is a bit of a sideshow’ – it’s something you need to be cognisant of, to be aware of, but it’s not driving decisions.”
Keep calm and carry on
It’s important that we don’t let Brexit take our attention away from our own financial planning needs. As we have shown, when it comes to Brexit and other key political events, it is important to maintain a long-term view, and not putting all of your investment eggs in one basket.
Abiding by these rules does require discipline, though – especially in an increasingly complex investment climate. And that’s where a regular financial review can really come into its own!
As professional financial advisers, it’s our job to recommend a suitable investment portfolio and make sure that you are invested appropriately according to the risks you are happy with. We can help you ensure you have a diversified portfolio, and can give you advice on when is best to ‘sit tight’ through periods of volatility. We will also provide the emotional discipline required to ensure plans are acted upon, by providing guidance, reassurance, support and stability to help you stay on course to reach your financial goals.
If you are concerned about the effect Brexit will have on your investments, or feel it’s time to review your options, please contact Wellesley Wealth Advisory today.
Invesco is a fund manager for St. James’s Place. Where the views and opinions of our fund managers or other third parties have been quoted these are not necessarily held by St. James’s Place Wealth Management.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.
1 Office for National Statistics, August 2020