How will your portfolio be affected by leaving the EU?
Thursday 6 February, 2020
Our Financial Adviser for Hertfordshire & North London, Cheshunt, Waltham Abbey and Hertford, Burcu Kaya explains how leaving the EU may affect the performance of the UK equity market and sterling.
After three and a half years, two general elections and several postponed deadlines, the UK formally left the EU on the 31st January 2020. Very little will change in terms of the trading relationship in the immediate aftermath as we enter a transition period which is due to last until 31st December 2020. I do not expect much of a reaction from the UK equity market over the next few days, but how markets perform in the coming months largely depends on what kind of Brexit we are facing.
What is the Brexit effect so far?
UK shares have generally split into two groups since the referendum. One group, consisting of companies with substantial international exposure, benefited from sterling’s weakness against major currencies. The other group, made up of domestically focused companies, has struggled as political uncertainty weighed on the UK economy.
After the general election in December, shares of domestically focused companies rallied in response to the greater clarity provided by the Conservative Party’s victory. However, by insisting that he will not request an extension to the transition period, the Prime Minister has set himself the difficult task of negotiating a free trade deal in eleven months and left the prospect of a ‘no deal’ Brexit on the table. The most likely outcome at this stage is that the two sides reach a limited agreement covering goods but not services. This would be a relatively ‘hard’ Brexit.
Looking ahead – sterling and equity market performance
We expect the pound to continue acting as a useful barometer. Over the last few years it has strengthened against the US dollar when a soft Brexit looked more probable and weakened when the chances of a hard Brexit increased.
The UK equity market has been largely shunned by investors since the 2016 referendum. As a result, UK shares have fallen to historic lows. While domestically focused shares would benefit more from a softer Brexit, we believe valuations are attractive enough to provide some support to the market in all but the very hardest of Brexits.
The Bank of England (BoE) will be closely monitoring negotiations. It left interest rates unchanged at its meeting on the 29th January, but a hard Brexit could lead to a slowdown in UK economic growth, leaving the Bank of England little choice but to cut rates later in the year. UK government bonds should rise in value under this scenario.
Burcu Kaya Mortgage & Protection Adviser in North London, Cheshunt, Hertford & Hertfordshire said:
‘Overall the message to investors remains the same, our aim is to not let short-term distractions like Brexit negotiations influence your financial planning and the management of your portfolio. After all, your investment portfolio is designed to deliver investment returns over the long-term, a period of at least seven years, and we expect the UK and EU to conclude at a minimum a limited free trade deal by the end of 2020. Please remember it is normal for the performance of your investment portfolio to fluctuate over the short-term, but our aim is to make it grow in the long-term, and we heavily diversify your portfolio so we can accommodate for uncertainties and mitigate any risks. Overall, I fully expect some short-term fluctuations so let’s enjoy the new times ahead and take advantage of any investments that may be undervalued. I know everyone hates change but it’s those that adapt the quickest that will reap the rewards which is why I see this as a new opportunity and think there are exciting times ahead.’
Burcu Kaya Mortgage & Protection Adviser in North London, Cheshunt, Waltham Abbey, Hertford & London continued: ‘If you are new to investing and you are looking for a financial planner please contact a member of our Thomas Oliver financial planning team on 01707 872000. Our qualified financial advisers offer financial advice in Hertfordshire and North London. It is never too late to start planning for your future. Remember to review and use your tax allowances for this tax year. For more information read my recent article: Use or lose your annual tax allowances before 5th April 2020.’
The trading relationship we agree with the EU will affect the performance of the UK equity market during 2020. However, we always remind our clients that they invest in equity markets over the long-term so they shouldn’t be concerned about any short-term fluctuations in performance.
The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. The contents of this article are for information purposes only and do not constitute individual advice.