Brexit: Until it’s certain, it’s uncertain.
Do you remember those days when the only news story in town was Brexit?
Today it seems that the world is only focussed on COVID-19, so it is easy to forget that the deadline to extend the UK's transition period has elapsed and the UK now sets sail into new waters on 1st January 2021, one whole year after the BBC first reported a mysterious virus in China.
Brexit negotiations have continued throughout the year and as time runs down, the competing claims and counter claims get more exaggerated, the news flow gets ever noisier. In the world of negotiation, one side's sell out is another side's compromise. Add such polarised opinion to the tinderbox of television soundbites and written newspaper rhetoric (and of course, let’s not forget social media) and the panic can rise if you let it.
This is an important lesson to learn. If you step back and take a pause, survey the scene free from any kind of echo chamber, and listen to what you hear, then you will reach the unmistakable and unshakeable conclusion that it's still noisy out there and Brexit is simply another discordant instrument being played on the global economic stage.
The other noises? Well, we have the novel Coronavirus of course, which affects the world on so many levels, be that human, political, economic, or philosophical. We have written a lot about this in recent months and you will have hopefully heard our podcasts.
Then we have the US election and the prospect of Trump or Biden. This is a binary choice, but it will be the minority who don’t have entrenched views who decide the election one way or another. If Trump wins, will the USA be able to free itself from the fractious drama in Washington which overshadows all news over the pond. If Biden wins, will it spell disaster for big Tech if he launches anti-trust probes? What if it’s close and concerns over mail in voting delay the decision longer than Bush versus Gore?
What of China and its expansion in the South China Seas and its human rights concerns? What about China and Russia’s extension of soft power that is rolling back years of western influence?
What about climate change? We have seen wildfires in Australia and all along the Western seaboard in the United States. Tropical storms have arrived earlier this year and with greater frequency.
Brexit can therefore be seen as yet another headwind that investors need to navigate and plot a course through, whilst keeping focussed on reaching whatever their individual goals might be, hopefully informed by a personal financial plan that is reviewed and refined along the way.
The risk of a no-deal remains very real, but does this mean that individuals need to take specific action?
Aside from wearing some noise cancelling headphones, you should remember that the outcome remains uncertain. As I write this, we just do not know what the outcome will be. As we move towards the deadline, rhetoric will inevitably rise as each side plays to its domestic audience and postures across the table. It will get even louder.
One should not draw too simplistic a conclusion on the trade negotiations. It is not a case of “if this happens, then what follows is … “.
Yes, whilst for equities, the worst-case scenario will most likely be no deal with the UK and the EU moving to World Trade Organisation (WTO) rules, with tariffs and regulatory barriers that prevent frictionless trade. This clearly has the potential for short-term disruption. However, those larger companies with international earnings will be less affected and holding investment funds denominated in overseas currencies might help.
But equally, if we see a deal and trade remains relatively easy, then this could boost confidence in UK assets and UK Smaller and Mid Cap companies, which have lagged behind the performance of larger companies, might flourish.
Whatever the outcome by the end of this year, Brexit remains just part of the noisy orchestra currently playing.
The UK remains under 5% of the world’s stock market by market capitalisation, which is lower than the market capitalisation of Apple! Sensible investors should diversify across asset type (equities, bonds, cash etc), geography, market sectors and companies, to reduce risk.
At The Private Office we have a strong preference for investing in funds, as opposed to direct shares, as we can spread the risks across a wider range of companies and different fund management styles and this achieves a balanced approach to Brexit risks. In our actively managed portfolios, within each individual fund there is a fund manager who will, within the mandates they have, tilt their portfolios to best position them to deal with the Brexit headwind as it evolves.
Brexit itself, therefore, remains a relatively minor issue on the global stage, with the world fighting a global pandemic, dealing with a change in the geopolitical order, and the small issue of the Presidency of the United States of America and subsequent future direction of the world’s largest economic power up for grabs! If investors can look beyond the near term, then climate change and the future of globalisation remain high up the agenda and should also inform views.
Investing carries uncertainty and, whatever the latest news story today, another will appear tomorrow. We position our portfolios with the best long-term interests of our clients at their heart. Through our trusted client relationships, we overlay this with a deep personal understanding of where our clients are heading and what matters to them by building robust personal financial plans that reflect these desires and concerns.
This time last year, no one had heard of COVID-19. Most people hadn’t heard of Wuhan. Everyone had heard of Brexit, but we still didn’t know the outcome. As we approach the end of the year, that position has not changed, but I wonder what new headwinds we will be sailing into in 2021.
This article has been written by Alex Hatfield, a Partner and Chartered Financial Planner at The Private Office. Alex has been with The Private Office since 2014 after a prolific career as a senior financial adviser following his graduation from Hull university with a BSc in Economics in 1991. For more information about Alex Hatfield take a look at his profile here.
The views, thoughts and opinions expressed in this article belong solely to the author and do not necessarily reflect those of The Private Office. The content is for general information only, does not constitute individual advice and should not be used to inform financial decisions. Most importantly, investment returns are not guaranteed and you may get back less than originally invested; past performance is not a guide to future returns.