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BREXIT and portfolio outcomes

The political establishment both in the UK, and Europe, did not acquit themselves well in the lead up to the EU Referendum. Extreme claims were made on all sides, exaggerating claims and playing on people’s fears and often irrational emotions – there certainly was not a balanced debate.

Away from the noise of politicking and the media, most economists that I read suggested that, while there would be a short-term dip in the economy due to uncertainty, long-term, Brexit was probably neutral to the UK economy. It might have a slightly positive, or slightly negative long-term effect.

We have woken up this morning to find that both the media and, perhaps more importantly, markets called Brexit wrong. Sterling has fallen dramatically overnight and the FTSE100 open 7% lower! Dramatic headlines but what does it mean for Bluecoat Wealth Management clients over the coming months, what will be the effect on them?

I often tell clients that markets react to unexpected news and hate uncertainty. This is an event that illustrates the point. At the time of writing (09.30 am), The FTSE has recovered some 3% since opening and is down a little over 4%, still some 500 points higher than where is was in February, so initial reactions would appear overdone. Sterling has also recovered some of its initial loses but volatility is likely to remain part of market life over the coming months.

It is important at this time, not to get emotional about investing or perceived losses. The chart below illustrates the emotional journey of investing and shows, that if you do not remain disciplined the temptation to sell low and buy high, can wreck your returns.

This volatility can be used to clients’ advantage with periodic rebalancing, which we do for clients at pre-determined times – effectively selling what’s hot (bonds at present) and buying what’s not (shares at present). When the pre-determined time comes for your rebalancing, we will take advantage of low prices if shares are still low.

Where clients can take comfort, is that that their portfolios are broadly diversified. The UK stock market only represents 6% of the Global market and most clients are not overweight UK. All our portfolios have substantial holdings in Global markets, spread across around 10,000 companies, of which the US represents 48%. While the US market might fall on the news of Brexit, if Sterling has weakened, this boosts the value of your holding in US shares. This will protect clients from much of the turmoil in UK markets.

In conclusion, while much is unknown politically at present, and the media are having a field day, markets will continue to deliver investment returns over the medium-long term. Companies will continue to make profits; Apple is not going out of business. By being broadly diversified and rebalancing at the appointed time, our clients are able to have piece of mind when the world around them appears very uncertain.

Please contact me if you have concerns about how your portfolio is affected, if you feel necessary before your next review.

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