Investment Markets & Portfolios post Brexit

The media frenzy seems to have abated a little after the shock result all of us at BDB woke up to on 24th June. I have had to strengthen my resolve to avoid the news as the sensationalist way in which they report things isn’t balanced and lacks the much-needed context for us all to be able to understand whether we should be concerned; their mission seems to be self-promotion not informing.

That aside, we have had only a handful of calls into the office expressing concerns about what they have seen in the press about “collapsing markets” but we thought it was timely to write this blog post as we don’t want to have our clients harbouring unexpressed anxieties. This follows on from the piece that Matt wrote a couple of weeks ago.

Here is a chart of our two most commonly used investment portfolios; 60% equity 40% bond and 40% equity 60% bond. The thing that stands out is how well these have stood up to events of the last week, but also how at odds this might at first seem; crisis, what crisis!

chart

So what are the factors at play here? Well there are 3 primary drivers:

  1. Small UK equity allocation – the equity component of these portfolios (60% or 40% respectively) have the geographical allocation broadly in line with the size of each country’s domestic stock market relative to the total global equity market. This sees the UK only representing 7% of the whole equity portion. Therefore, whatever happens to FTSE 100, 250 or All Share is only going to have a relatively small impact to the portfolio so long as those events are somewhat isolated (they weren’t in 2008).
  2. Currency – as the first point describes, only 7% of the equities are invested in the UK, therefore the remaining 93% is in other countries and consequently denominated in a currency other than Sterling. I am sure that you’re aware that the value of the Pound has fallen against the other major world currencies, but what that means is that without the values of the underlying shares moving, investors have immediately seen an increase in the £ valuation of their international assets.
  3. Flight to quality – many stock market investors are not as disciplined nor hold the same long-term outlook as our clients (in fact they are probably more accurately described as speculators not investors) and what we saw in the immediate aftermath of the Brexit vote being announced was people selling their UK shares. When the speculators do this where do they tend to put their money? The answer is high quality fixed interest assets (government and corporate bonds); which is precisely what makes up the non-equity portion of the BDB portfolios.

These 3 factors in combination have resulted in the portfolios experiencing a healthy increase over the last week – unfortunately this doesn’t make for sensational, attention grabbing headlines or copy and why this hasn’t dominated the news channels.

Without a shadow of doubt there is certainly a lot of uncertainty concerning how we (if indeed we do) extricate ourselves from the EU and what a Brexit UK looks like, however our key message is unchanged:

keep-calm-wall-sticker-500

 

We really don’t want anyone worrying though, so if you have queries or concerns then do please get in touch with one of the team to talk things through.

Andrew

 

Posted by:
Andrew Brook-Dobson

Published:
July 5th, 2016

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