Impact of Brexit

Europe mapAs your Financial Adviser my job is to take the burden of worry from you. Some clients are understandably concerned about the impact of the EU Referendum on them and their investments or retirement plans, and there are countless views on whether or not it will benefit the UK in the long term. I am always available to discuss any particular concerns or queries that you may have, but I wanted to provide what I hope is a balanced view on the investment impact.

Even the Leave Campaigners agree that the short-term impact of Brexit on the UK economy is likely to be negative, although it is fair to say that the initial market reaction has been much less dramatic than was anticipated. The uncertainty around the timing of the formal Article 50 resignation coupled with the unexpected political upheaval does mean that the current volatility in UK markets looks set to continue. Some businesses will undoubtedly postpone investment decisions and consumer spending will be more cautious, meaning slower or possibly negative growth. Inflation, which has been hovering around 0%, is expected to increase due to the weaker pound.

To boost the economy, the Bank of England has the option of reducing the interest rate, potentially to zero, and/or injecting funds via quantitative easing. Mark Carney has made clear that they have robust plans in place to stabilise the UK economy, including an additional £250 billion of liquidity if needed.

In all of this upheaval there will be winners and losers – borrowers would benefit from a further reduction in interest rates, while savers would lose out, plus have the added concern of higher inflation. Businesses which export outside the EU should see a boost due to the weaker pound, while retail, construction and holiday firms have all predicted falls in revenue.

Although the focus in the past few days has been on the FTSE indices and sterling, it is worth remembering that the UK is not the biggest player in the European economy, and is a relatively small although significant element of the global economy. At the time of writing, the FTSE100, which is considered a good barometer of global markets, had rebounded to slightly above its level at the start of June. Meanwhile the FTSE250, considered a better indicator of UK expectations, was still around 10.6% down. Although it has been hard for us to avoid the topic of Brexit over the past few weeks, in global investment terms so far it has been a blip, with the recent fluctuations in oil prices having a much greater impact on market values.

A basic principal of investment is to diversify, and not “put all your eggs in one basket”. We recommend multi-asset funds for this very reason – so that our clients are invested in a range of different asset classes, geographical areas and industry sectors. This means that if there is a negative event for a particular asset, for example mid-cap UK shares, it only affects a small proportion of your investment and other assets can compensate. We are not short-term traders – our clients are invested for the longer term, and while any short-term dips along the way are unwelcome, the long term growth is what matters.

At the time of writing, every one of the main multi-asset sectors has actually benefited from global events of the past month overall, ranging from an increase of +0.3% for the 20%-60% Shares sector average to +3.3% for the Global Equities sector. Longer term increases vary from +20.5% over the past 5 years for the more cautious 0%-35% Shares Sector to +40.0% for the higher risk Global Equities sector. Contrast this with the UK Smaller Companies sector, which is down -10.9% over the past month (but still up +47.1% over the past 5 years).

In summary – the UK economy is in for a bumpy ride over the next few months, but the global investment outlook is still positive. The sky hasn’t fallen in, the sun will still come up (although undoubtedly hidden behind clouds – this is Northern Ireland!) and life will go on. Please do give me a call if you are worried in any way about any aspect of your finances – I have no holiday plans for July and will be available.

Emma

Investments can go down as well as up and you may not get back as much as you originally invested.

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