Brexit – Keeping a Sense of Perspective
As Brexit divisiveness and uncertainty persists, it is only natural to be distracted by this contentious national debate. It is also not unusual to be concerned about your investments, but it’s important to put potential outcomes into perspective.
Throughout history seismic events have occurred with varying effects on markets – but a recovery typically occurs once there is some sort of resolution or clarity. For example, it’s hard to imagine anything more seismic than when nations engage in conflict, but even here stock market investments have proven to be remarkably resilient.
Take the invasion of Iraq, for example. We can see a slump in UK and US stock markets as this relatively short phase of conflict began, extending the market falls from the bursting of the tech bubble. The market recovery anticipated the end of formal combat and was equally swift. Markets maintained their upward trend for some time afterwards, despite the enduring difficulties stemming from the war.
The UK market experience during the Falklands was similar. Although the war between Argentina and the UK dominated headlines for months, it had little effect on the UK’s stock market – in fact, a bull run continued for five years up to the Black Monday crash on 19 October, 1987.
After the EU referendum result in 2016, UK assets reacted immediately and violently. But the global economy was rebounding at the time, fuelled by Chinese stimulus and the prospect of pro-cyclical tax policies from the US, so global markets soon recovered their poise. Any investors selling at this point would have missed out on nearly 50% returns from world equities to date1.
While the Brexit debates can feel exhausting, divisive and all-consuming now, doing little to inspire investment confidence, we believe other factors will continue to have a bigger effect on portfolios.
Factors which may impact investments more
Whatever the short-term effects of Brexit other forces may have a more meaningful impact on investment portfolios. For example, companies in the FTSE 100 make more than 70% of their revenues outside of the UK so global factors have a big influence on this index.
We have opted to invest more in FTSE 250 companies for portfolios’ domestic exposure and directly in international markets instead. It’s clear that recent declining growth forecasts worldwide and slumping manufacturing output – both largely impacted by the US-China trade war – are affecting the prices of assets exposed to economic confidence. Conversely, the prospect of central banks on an easing tilt around the world has boosted the performance of bonds.
The fact remains, that because of an inter-connected global economy – and especially because of what happens in the US economy – we expect other drivers to have a greater long-term impact on investment portfolios than Brexit.
It’s important not to overreact
Whatever the immediate short-term outcome of Brexit talks or a prospective deal, the result could still be troubling and trigger market gyrations. In these circumstances we are well advised to be wary of political and market noise, which can cause irrational knee-jerk behaviour.
Staying committed to our principles
At Netwealth, irrespective of Brexit, our approach is to focus on our core philosophy of investing efficiently. Of course, we monitor potential consequences very closely: the effect on sterling, of a change of government, of new trading terms and relationships – and we work with an understanding that markets can deliver a wide range of potential outcomes.
While short-term uncertainty is never comfortable, it can be managed. We make investment decisions on a strategic basis, and accept that there may be bumps along the way as we take a long-term approach to help investors reach their objectives.
Please remember that when investing your capital is at risk.
1 Source: Bloomberg. MSCI World Total Return Local Currency Index returned 47.9% between June 24th 2016 to 22nd October 2019.
Throughout history seismic events have occurred with varying effects on markets – but a recovery typically occurs once there is some sort of resolution or clarity. For example, it’s hard to imagine anything more seismic than when nations engage in conflict, but even here stock market investments have proven to be remarkably resilient.
Take the invasion of Iraq, for example. We can see a slump in UK and US stock markets as this relatively short phase of conflict began, extending the market falls from the bursting of the tech bubble. The market recovery anticipated the end of formal combat and was equally swift. Markets maintained their upward trend for some time afterwards, despite the enduring difficulties stemming from the war.
The UK market experience during the Falklands was similar. Although the war between Argentina and the UK dominated headlines for months, it had little effect on the UK’s stock market – in fact, a bull run continued for five years up to the Black Monday crash on 19 October, 1987.
After the EU referendum result in 2016, UK assets reacted immediately and violently. But the global economy was rebounding at the time, fuelled by Chinese stimulus and the prospect of pro-cyclical tax policies from the US, so global markets soon recovered their poise. Any investors selling at this point would have missed out on nearly 50% returns from world equities to date1.
While the Brexit debates can feel exhausting, divisive and all-consuming now, doing little to inspire investment confidence, we believe other factors will continue to have a bigger effect on portfolios.
Factors which may impact investments more
Whatever the short-term effects of Brexit other forces may have a more meaningful impact on investment portfolios. For example, companies in the FTSE 100 make more than 70% of their revenues outside of the UK so global factors have a big influence on this index.
We have opted to invest more in FTSE 250 companies for portfolios’ domestic exposure and directly in international markets instead. It’s clear that recent declining growth forecasts worldwide and slumping manufacturing output – both largely impacted by the US-China trade war – are affecting the prices of assets exposed to economic confidence. Conversely, the prospect of central banks on an easing tilt around the world has boosted the performance of bonds.
The fact remains, that because of an inter-connected global economy – and especially because of what happens in the US economy – we expect other drivers to have a greater long-term impact on investment portfolios than Brexit.
It’s important not to overreact
Whatever the immediate short-term outcome of Brexit talks or a prospective deal, the result could still be troubling and trigger market gyrations. In these circumstances we are well advised to be wary of political and market noise, which can cause irrational knee-jerk behaviour.
Staying committed to our principles
At Netwealth, irrespective of Brexit, our approach is to focus on our core philosophy of investing efficiently. Of course, we monitor potential consequences very closely: the effect on sterling, of a change of government, of new trading terms and relationships – and we work with an understanding that markets can deliver a wide range of potential outcomes.
While short-term uncertainty is never comfortable, it can be managed. We make investment decisions on a strategic basis, and accept that there may be bumps along the way as we take a long-term approach to help investors reach their objectives.
Please remember that when investing your capital is at risk.
1 Source: Bloomberg. MSCI World Total Return Local Currency Index returned 47.9% between June 24th 2016 to 22nd October 2019.
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