What Would Brexit Mean for Your Investments?
With the referendum on EU membership a matter of weeks away, we consider what a vote to leave could mean for your investments. Should you be worried and what can you do if you are?
Surveys have shown that investors are worried about a possible ‘Brexit’ and what this may mean for their investments, both in the short and longer term. Many fund managers (especially those investing in the UK equity market) see Brexit as the biggest risk to their fund.
It should be noted that, as we stand today, a vote to leave is less likely than a vote to remain but polls have been narrowing recently, turning attention to what may happen should we vote for Brexit.
The overarching tone of the debate is one of uncertainty. The truth is that we neither know what the future looks like should we stay or should we go. Both are unknown and therefore, making accurate, specific predictions is almost impossible. We can however, make some broad judgements on how the outcome may affect our investments.
Let’s look at the different asset classes in turn:
Bank of England Governor, Mark Carney has indicated that UK interest rates would likely be cut following a vote to leave. With interest rates already at a historic low, this could see the UK with a 0% or even a negative interest rate. A vote to remain might lift the veil of uncertainty, leading to rates rising in the medium term. Whatever the outcome, the returns from cash look likely to be modest for the foreseeable future.
A Brexit vote would likely knock UK equity prices – especially small and mid-cap shares. Holding overseas equities could be a good solution if you think a Brexit vote is likely. Banks and financial stocks would likely be the hardest hit with a vote to leave given lower or negative interest rates and concerns about the City of London’s global influence outside of the EU.
The impact on fixed income markets is trickier to call. Gilts (UK Government bonds) may come under pressure if foreign investors (who own around a third of them) get worried about the longer-term health of the UK economy following a Brexit vote. Corporate bonds could be negatively or positively affected depending on the specific bond in question so having a broad spread of bonds is likely to be a good strategy.
Sterling has already weakened on fears of Brexit. A vote to leave would see Sterling fall (probably by 10%-15%) in the short term. This isn’t necessarily a bad thing as it will help UK exporters but it will also mean importing inflation. A vote to remain would probably see Sterling rebound by a few percentage points as the uncertainty lifted.
Property prices would likely be hit hard by Brexit. Reduced immigration would lessen demand for housing stocks and some multi-national companies may eventually relocate some of their operations to mainland Europe. Property prices also mirror the health of the UK economy so if this is hit by Brexit as some economists warn, this may also suppress both residential and commercial property investments.
Gold is seen as a safe haven in difficult times and it is no surprise to see prices up strongly in 2016. Many investment professionals see holding some gold as a defensive measure in the short-term but prices may ease off or fall back if a vote to remain in the EU is delivered in June.
We can’t predict the outcome on June 23rd with any certainly but we can ensure our investment portfolios are somewhat protected. The key strategy in our opinion is diversification. Putting all your eggs in one investments basket is unlikely to be a good move and could leave your portfolio exposed.
Investment markets hate uncertainty and there has been plenty of this around in the first half of 2016. Whatever the outcome of the referendum, at least we will have a clear direction of travel.
This article also features in the summer 2016 edition of KnowlEDGE Magazine.