With so much uncertainty still surrounding Brexit, many people are finding themselves wondering what’s next for their investment portfolio. Here, Richard Litchfield, Head of Operations at P2P platform Lending Works, discusses what some of the possibilities might be beyond March.
Even at this late date in the build-up to Brexit, it remains an ever-changing beast. At the moment, it seems that new breakthroughs in the process are about to be reached on a daily basis, only for the news to change direction by lunch. Then there’s the possibility of the UK walking away from the table with no deal, which casts even more uncertainty over procedures.
Because no-one can really say what will happen for sure, it’s understandable that investors have found themselves in a quandary about what they should do. Is taking a long-term view and sticking to your guns the right thing? Or should you be continuously adjusting your portfolio in-line with the latest developments from Brussels and London?
While it’s still too early to hand out investment advice with any confidence, we can look at some of the ways that Brexit may end up impacting your portfolio.
Sterling’s performance versus the markets
The performance of the pound since the EU vote in 2016 has been a rollercoaster, having been as low as $1.21 against the dollar at the start of 2017 then bouncing back to a peak of $1.42 by the start of 2018, not to mention all the peaks and troughs in between. The way sterling has moved has typically been viewed as the canary in the coal mine for how the Brexit process was doing, but, as an investor, it’s important to understand the complex relationship the currency has with the UK markets.
While 97% of FTSE 100 companies are based in the UK, 71% of revenues generated by them comes from outside of the country (Schroders). This means that when the pound is weaker against other currencies, these revenues are worth more when converted back to sterling. This also works in the opposite direction for a strong pound. This happened right after the referendum, where the pound plummeted but the stock market grew.
So, if one of the outcomes of Brexit sees our currency lose value, it may well cause investments in FTSE 100 firms to be worth more. On the other hand, the FTSE 250 has a much higher proportion of revenue generated in the UK — around 50%. And, should the pound rally off the back of Brexit, companies listed on this market are in line to do better.
Generally, investors consider a deal being reached to be a positive for sterling and a no-deal to be bad news, so you may wish to keep your ear to the ground and make investments in the appropriate market should one outcome become a certainty.
UK interest rates
The UK’s interest rates are another factor that will be heavily influenced by Brexit and, subsequently, will impact your investments. The Bank of England (BoE) has raised the base rate twice in the last two years, from 0.25% to 0.5% in 2017 and then to 0.75% in 2018, but a recent Financial Times poll found most economists believe there will only be another increase if the UK leaves the EU in an orderly manner. The BoE has previously suggested a no-deal would result in a rate rise, but the poll found that many economists thought that they wouldn’t do so.
Potential interest rate rises can be good news or bad news depending on where your investments lie. For instance, higher rates are, in theory, good news for those with ISAs as banks should pass the benefits on to savers, though they have been slow to do so recently. But, if you’re involved in the buy-to-let property market and you’re on a variable rate mortgage that tracks interest rates, you’d be likely to see your repayments increase and your investment become pricier. So, depending on what makes up your portfolio, you may see a positive or negative impact.
The political outcome
Though it can have wide-ranging economic effects, Brexit is also a political issue, and this can also impact your investments. In recent weeks, we’ve seen potential deals be voted down and votes of no confidence in the leadership of the Government, and each of these has had short-term impacts on the value of sterling and spikes in the stock markets. And, looking at the bigger picture, the exact outcome of the Brexit process hinges on the capability of politicians to negotiate a deal with the EU.
If the Government is incapable of reaching an agreement, the prospect of a no-deal Brexit becomes much stronger. Because it’s never happened before, nobody can be precisely sure what the impact on the economy and investments will be, but the majority of experts and even the Bank of England have issued warnings of a potential recession. Should a no-deal scenario appear likely, it’s advisable to take financial advice on how best to preserve your wealth for the future.
Whatever the outcome of the Brexit process, it will impact your investments one way or another. By staying informed and ready to take financial advice, if necessary, you’ll be better placed to deal with the outcome of the UK’s divorce with EU.
By Richard Litchfield
About the author
Richard Litchfield is the Director of Operations at Lending Works, one of the UK’s leading P2P lending platforms. With a rich background in credit underwriting, Richard oversees the day-to-day operations of the company, ensuring it delivers for both investors and borrowers.
