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How to prepare portfolios for the possibility of Brexit

As MPs prepare to vote on Theresa May’s deal, three experts give their views on what may happen next

Brexit has so far brought mass uncertainty across many different industries, but particularly among financial services. We will hopefully discover more next Tuesday (11 December) when MPs vote on Theresa May’s Brexit deal; until then, investors need to be vigilant and start preparing for the deal to go ahead. Three industry experts give their views below.

Should investors be worried ahead of the 2018 deadline?
Fundscape chief executive Bella Caridade-Ferreira: Yes, investors should be worried ahead of March because there will be increased volatility and markets will be on a knife-edge. Investors are already worried – our data shows that inflows are slowing to a trickle and sizeable volumes are being withdrawn or moved to cash and defensive products.

KW Wealth head of research Rupert Thomson: Yes. The outlook for Brexit is as unclear as ever and increased volatility can be expected as a result of the March deadline which is drawing ever closer. ‘No deal’ is the big risk and while there is no majority for it, it’s the default option and can be far from ruled out. If there were to be a no deal, the worry would be that the Bank of England’s recent doom-laden forecasts might contain more than a grain of truth.

There would also be the increased risk of both a general election and a Labour victory. That combination would be certain to trigger a sell-off both in the pound and also to a lesser extent in UK equities.

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Should investors take Brexit-related proactive actions to their portfolios, such as lowering exposure to Europe?
Fundhouse managing director Rory Maguire: In terms of response, we take a probabilistic view. In order to protect clients from Brexit in some meaningful way, we need to get two related decisions correct, in sequence.

First, what the likely outcome will be – a soft or hard Brexit, for example. The odds of either seem 50/50. Then, once we have a view on that, we then need to predict what investments we believe will perform favourably given either scenario. The odds of getting this right are probably 50/50 too. So getting both right together, which is required, makes the odds close to 25 per cent (50 per cent of decision one and 50 per cent of decision two). With odds of one in four, we prefer not to place any investments either way. Instead, whatever the outcome of Brexit, we aim to take advantage of any overreactions by the market, should these occur.

Caridade-Ferreira: As for lowering their exposure to Europe, investors would be better off lowering their exposure to the UK and increasing it elsewhere. As we know, diversification is the key to mitigating risk, so investors who want to stay invested should be going for global exposure, especially as the UK tends to represent around 6 to 8 per cent of the holdings in global funds.

The downside, of course, is the inevitable rise in inflation and exchange rate risk which can affect portfolio values, so some thought should be given to underlying denominations. To be honest, investors are stuck between the devil and the deep blue sea. They either go into cash and sustain negative returns or they stay in the market and risk a rollercoaster ride.

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What opportunities can Brexit bring for investors?
Maguire: There could be many, but it seems likely that asset classes linked to the UK economy could sell off in an overly emotional way. Examples could be UK smaller company equities, higher-yield sterling debt and property, for example. There could be buying opportunities in these asset classes if the market overreacts in the short term.

How could Brexit impact on investors in the years ahead?
Thomson: If there is a Brexit deal, the impact on markets – beyond an immediate relief rally – should be limited over the subsequent couple of years as the transition period, which is basically a continuation of the status quo, will continue until at least the end of 2020.

Caridade-Ferreira: I expect a very difficult time ahead for the UK for the next five to 10 years. At the very least, we will have to unlearn 45 years of doings things in a certain way and learn a whole new set of rules and regulations in a very short time frame.

The impact on the economy will be significant – we’ve already wasted two years doing little else but talking about Brexit – If we leave the EU, we will waste much of the next five to 10 years adapting to Brexit. What does that mean for the investor? Volatile markets, the potential for another extended recession, a marked drop in the value of the pound, high inflation, low interest rates, sluggish economic growth – not exactly a set of factors to inspire investor confidence.

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