The impact of Brexit on your investments

James Yardley 24/06/16 in Economics & politics, Ideas & insights

Brexit is a major event and while there will be uncertainty and volatility in the coming weeks, it is important to note that there are positives as well as negatives for your investments.

Investing is for the long term and it is worth remembering that selling when the market is falling can sometimes mean you simply lock in your losses. On the other hand, short-term market drops may provide opportunities. We take a look at what might happen to your investments.

How will the fall in the pound impact your investments?

Around mid-morning on Monday, the pound is now down 11.3% to £1.33 versus the dollar, from its value of £1.50 directly before the vote results started coming through. It is also down versus all other major currencies including the euro.

What might happen to your UK investments?

The fall in the currency won’t have a direct impact on your UK investments. It may however benefit companies that get a lot of their profits and revenues from outside the UK. On average, FTSE 100 companies get 70% of their earnings from outside the UK. These stocks could actually see a rise in their profits from when they convert their overseas earnings back into pounds.

A fall in the pound is not good news for importers, but it can be a boost for British exporters because it makes our goods cheaper for overseas customers.

What does this mean for your investments in the rest of the world?

It won’t be good news if you want to go on holiday but in most cases, taken in isolation, the fall in the pound will actually be good for your international investments. If you’re invested outside the UK in, for example, a global, US or a European equity fund, you may gain in sterling terms from the fall.¹

So, for example, if you own a US equity fund and the pound is down 8% versus the dollar but the US market is down 5%, then overall you have made a net gain of 3% in sterling terms.

What about the fall in the UK stock market?

The FTSE 100 is down 4.3% at time of writing but is still above 6000 (although it dipped below at times on Friday). It is worth remembering it was as low as 5,500 in February. Some of the fall will be due to concerned investors selling in the short-term, but it is important to remember that many of these companies are diversified global businesses. Their exposure to the UK can be quite small. The fall may actually present some opportunities and as mentioned above many of these companies benefit from a weaker pound.

Cyclical stocks, such as banks and house builders, have fallen quite heavily. Mid-cap and smaller companies have greater domestic UK exposure and have therefore suffered the most. The FTSE 250 is down about 11.6% at the time of writing.

We always advocate investing for the long term and we don’t believe any of the companies that previously had good fundamentals yesterday have become bad overnight.

What about bonds?

As of Monday morning, UK government bond (gilt) yields had fallen below 1% for the first time in their history2. This can be good if you have funds exposed to them as yield moves inversely to price. The market is now pricing in future interest rate cuts and intervention by the Bank of England. Some have speculated there may even be a rate cut today.

US treasuries have also rallied, meaning their yields too have fallen and are currently at 1.47% versus 1.75% the day before the result was announced3. Corporate bond spreads are wider meaning prices are down. The high yield market is suffering the most.

How is gold performing?

Gold has soared in sterling terms and finished Friday up about 13.8%4. Gold miners shares have also rallied sharply.

Three Elite Funds that could see you through the volatility

If you are investing in the coming days, here are three Elite Rated funds that have a strong track record of protecting investors’ money in down markets.

Blackrock Gold & General

Gold is a hedge against uncertainty and there is likely to be a lot of uncertainty in the coming months. Other EU countries may demand their own referendums. Volatility is likely to increase. On top of this, the global economy is fragile. Some exposure to a gold equity fund should help hedge against these risks. The BlackRock Gold & General fund has a very long track record and is managed by mining specialist, Evy Hambro.

Premier Defensive Growth

Premier Defensive Growth is an absolute return fund that seeks to deliver positive returns in all market conditions. The fund is unlikely to shoot the lights but has consistently delivered a good return in a wide variety of market conditions. It could be a good option for an uncertain world where cash interest rates are close to zero. The fund has an excellent record of protecting investors in falling markets.

Evenlode Income

Evenlode Income is one for those who want to be a little bit more contrarian. This is a core UK income fund that has relatively little domestic UK exposure. The fund invests in very high quality defensive companies. Top holdings include Unilever, Diageo, Sage, GlaxoSmithKline and AstraZeneca. These stocks might get caught up in an initial sell off but they could actually benefit from a weaker pound. These are large global companies which a significant part of their sales outside the UK. If sterling falls, this actually leads to their earnings going up.

 

¹Assuming you are not using a hedged share class
²Bloomberg Markets data, 27/06/2016, 6:07am
³Bloomberg Markets data, 27/06/2016, 6:07am
4FE Analytics, Bloomberg Gold Sub, GTR in GBP, 23/06/2016–24/06/2016

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views of the author and any people interviewed are their own and do not constitute financial advice.