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Brexit - The Impact on Clients’ Portfolios

04/11/2016

Following the referendum vote and never ending news stories, Neil Jefferies, Head of Adroit Financial Planning, answers questions about what impact the referendum would have on clients’ portfolios.

So is the vote to leave the EU good or bad for investors?

How long have you got? The answer isn’t as simple as good or bad, and it also depends on which way you voted. Concerning investments however, then it’s fair to say that investment markets don’t like surprises, and anything like this did, as we saw, have an immediate impact on markets around the world.

In the immediate aftermath of the referendum vote, investment markets experienced a particularly volatile few days with global equity markets opening on Friday, 24 July 2016 anywhere between 5-10% lower, whilst the pound fell to its lowest level against the dollar in over 30 years.

The volatility has been on the news, but how is it that the FTSE 100 is showing that it has actually risen since the referendum?

Companies within the FTSE 100 derive over 70% of their revenue from overseas and therefore, they have actually benefited from the weakness in sterling. Subsequently the FTSE 100 is currently trading near a one year high.

So that’s a good thing then?

It’s important to see beyond the FTSE 100, as UK equity exposure in a client’s portfolio is likely to consist of all sectors including large, mid and small cap investments. If we look at the more domestically focussed ‘FTSE 250’ and ‘All Share’ indices, these have endured a more challenging period as the UK economy is now potentially at a greater risk of a slowdown.

Since the referendum result, the FTSE 250 is down 10%; the FTSE Small Cap down 4.5% and the All Share down 1%.

With clients’ portfolios being diversified, what are the wider implications?

Well, volatility has not only been confined to just here in the UK, but also in Europe , especially as political uncertainty comes to the fore there as well. However, we also need to bear in mind that both France and Germany have elections this year. There’s a belief that the European Central Bank will remain committed to their “whatever it takes strategy” but without fiscal reform and the current political uncertainties, certain European markets, and sectors, have suffered, with European banks particularly hard hit in recent days.

Equally here in the UK, our own Bank of England has taken steps to try and offset the generally held view that the uncertainties will lead to a fall in inward investment in the UK, and as such, economic growth will be more subdued than previously expected. Central Bank action can only go so far to offsetting the impact on investment holdings and arguably the limitations here can be seen currently in the UK commercial property market.

So is it bad for clients’ portfolios then?

In terms of the impact the vote on clients’ portfolios, the fallout has not been as bad as initially feared and diversified portfolios have seen their values move back above the pre-referendum levels.

This clearly demonstrates the benefits of investing in a diversified and global portfolio (exposure to non-sterling currencies, particularly the US dollar), with fixed interest and global defensive equity income funds performing strongly in light of the heightened uncertainty which is now apparent.

UK government bonds, with their ‘safe haven’ status, have been a stand-out performer and portfolios have benefited from this along with our exposure to defensive UK fixed income funds.

So it’s all about diversification, spreading the risk then?

Yes diversification and active management is key here. Our portfolio management looks to obtain performance of our clients’ portfolios, through a combination of income and growth. In times of greater volatility and with capital preservation a key objective for our clients, investing in holdings that generate a steady stream of income can safeguard (to some extent) the falls seen recently in the markets, particularly in higher risk markets such as equities.

We have been active in our discussions with our Investment Managers, and have seen them reducing exposure to UK commercial property, European equities and increasing the cash weighting within portfolios.

So without a crystal ball, what is the outlook?

Moving forward it is likely to be an uncertain period for investment markets, particularly over the summer and into the second half of the year. We at Adroit believe that during these periods it is essential to be diversified and active when investing our clients’ monies.

Uncertainties like this however, can provide excellent investment opportunities and our selected investment managers will be using these opportunities to tactically employ the cash weighting at a later date, this is to cease the opportunity of enhancing our client’s returns.

In summary, it is not over yet but diversification and active management is the key to limiting risks and taking advantage of these uncertain days to enhance returns with clients’ portfolios.

For more information about investments and clients portfolios, please contact us at enquiries@adroitfp.co.uk