23rd November, 2018
Brexit – An Evolving Beast
*The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of DB Wood*
To this day I still believe David Cameron’s decision not to lead the country through one of the most important decisions in a century was the wrong one. I also actually quite liked Dominic Raab until last week, and even Boris (I think everyone does in a weird sort of way) despite his shortcomings. Theresa was never going to lead through passion, motivation or empowerment, but clearly that isn’t why she was elected. Her steely iron determination to take all the critics and battle through for the sake of democracy and the British people deserves an applause.
Reading the news, you could be forgiven for believing that the UK government is in turmoil, and Brexit is going to hell in handcart. The facts… last week the government agreed a withdrawal agreement with the EU, Theresa’s cabinet backed it, 8 MPs resigned including Brexit Secretary Dominic Raab, and one has been reappointed.
Now of course, the chances of a hard Brexit/no deal have risen over the last week, but you would have to say the chances of a soft Brexit have also risen given that until now we had no withdrawal agreement. As an IC we have studied the deal, and whilst it isn’t perfect, it’s not bad either – the majority of the peoples promises have been agreed, and we have really only had to compromise on a backstop agreement in addition to further payments to the EU throughout the transition period. Did we ever think that things would run smoothly? Possibly this is why Theresa has pushed this through well in advance of any deadline, and its pleasing to see that at the time of writing she is heading to Brussels for more talks.
Ultimately, throughout this process as an IC we have remained focussed on staying balanced, not allowing our clients to be exposed to either scenario. Irrespective of our personal views and analysis, we realise that this is an extremely fragile beast, and there are a range of potential outcomes. We have built an internal model that stress tests the portfolios on these various outcomes, giving us a centre from which to analyse our positioning.
The proof is always in the pudding though, and last week we saw a significant sell off in domestic UK equity exposure (not FTSE 100), and a significant rise in overseas equities because the pound fell heavily. We lost on one hand but gained to the other – all portfolios were flat or up, so it was great to see our philosophy in action.
Volatility breeds opportunity, so last Friday morning as an IC we made the decision to take some profits on our overseas equities in the higher risk portfolios, consequently buying into UK equities and therefore protecting us from a soft Brexit outcome. Moreover, we have reduced our property exposure in the Very Low Risk portfolio and are holding a greater weighting in cash in the short term.
Summary… we remain balanced, aware of the risks, and opportunistic.