18th July, 2019
Brexit Update – New Leader, Same Issues…
It is now more than three years since we first voted to leave the European union, yet frustratingly it feels like we are no closer to knowing the final result. Soon a new Prime Minister will inherit the mammoth task of uniting a divided country, but will it change the Parliamentary arithmetic? If not, will the EU even allow us another extension? What about a second referendum? All these questions still need an answer, and at this point it seems impossible to find a solution that would please everyone.
One of our jobs as an investment team is to remove the emotion from the decision making process. I am yet to find anyone who hasn’t got an opinion on Brexit, so it’s not an easy task, but our focus is on ensuring clients’ money is protected whatever the outcome, rather than predicting it.
Our central case is, sorry to say, that the uncertainty continues for some time. There is, of course, the chance that Boris or Hunt miraculously get new concessions from the EU that provide enough support for an improved deal. However irrespective of Boris’ negotiation track record…. it seems highly unlikely, especially in the short time that anything will be resolved before the October deadline. Another way of getting an answer quickly would be a general election, but with both main parties likely to lose a large portion of their seats in Parliament, it is unlikely they would risk it. What if the new PM just takes us out on 31st October? Here the barriers are a Parliament that still wants to remain and would probably wrestle back control, and the EU who, despite their media briefings, want us to stay… we buy a lot of BMWs after all! These scenarios shouldn’t be ignored then, but most likely we will be approaching the EU for another extension sometime in October, further prolonging our fate.
Continued uncertainty is a drag on the UK economy, making it harder for people to spend and companies to invest. At this point we therefore remain underweight in UK assets, looking for better opportunities overseas. However, our overarching focus is to ensure the portfolios are as ‘brexit-proof’ as possible, balancing exposures to UK and overseas assets, and importantly different currencies, as these are volatile in and amongst the Brexit twists and turns. On that note we are pleased to attach an updated Brexit infographic, giving you more detail on the potential outcomes and what it could mean for the portfolios.
Importantly, we would emphasise the significance of flexibility in these times. As an example, just 10 months ago, we were running with a near 20% allocation to traditional UK bricks and mortar property in the Low to Medium Risk Portfolio. Today that weighting is at 4.5%. Most investment teams either don’t have the regulatory permissions to move things quickly, or the willingness to. We have both, and have already discussed how we would alter the portfolios in each eventuality. Notably, these aren’t just focussed on protecting clients’ wealth. Brexit volatility will also create short and long term investment opportunities, and we are ready to take advantage of these as well.