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Four tips for investors from Brexit

19 October 2020

3 minute read

The clock is ticking for UK negotiators to seal a trade deal with the EU by 31 December – the date when the transition period following Brexit ends. Here we explain what it all means for investors.

Who's it for? All investors

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek professional independent advice.

What you’ll learn:

  • How the UK stock market has performed since the vote for Brexit.
  • How to ride out ongoing uncertainty.
  • Why a fall in sterling is not always bad for investors.

Few could have predicted after the EU referendum result in 2016 how long it would take the UK to leave the EU nor the long drawn out negotiations on a trade deal as the country approaches the end of the transition period on 31 December 2020.

Getting a trade deal done has been hampered, partly because political leaders and businesses have been thrown in to turmoil by the coronavirus pandemic.

The twin uncertainties of post Brexit negotiations and coronavirus certainly make it challenging for investors.

Here, we consider some of the potential lessons from the Brexit process, and how you as an investor can use these, amid ongoing economic and political uncertainty.

Bear in mind that investments may fall as well as rise, and there is the risk that you could get back less than you invest, no matter what your investment approach.

Tip 1: Focus on the long term

The FTSE 100 index of Britain’s biggest companies has certainly been rattled at times, with market prices swinging on several twists and turns during the Brexit process and, more recently, the coronavirus crisis. Since the referendum vote in June 2016 the performance of the UK stock market has lagged those of key world markets such as Europe, the US and Japan1.

This is partly driven by uncertainties over trade talks with the European Union but also due to the types of company that make up much of the FTSE Index. Oil companies feature large – and in 2020 the oil price has had a bad year to date as demand slumped during worldwide lockdowns. Investors’ recent hunger for technology stocks has also affected the UK market because the FTSE Index contains few tech companies. Instead, many investors have turned to the US to satisfy a hunger to own the likes of Facebook and Apple.

Another factor is the economic impact of the pandemic has caused many big British firms to halt dividends – leading investors to shun the UK market2.

With trade negotiations between Britain and the EU taking centre stage and testing investors’ nerves it could make it tempting to sell out of the market. However, ditching investments during turbulent times may only serve to crystallise any losses, and means investors could miss out on any potential recovery in the market.

Focusing on the long-term and the reasons you invested in the first place is one way to prevent knee-jerk reactions when markets are choppy. Of course, there are no guarantees that you’ll be rewarded for sitting tight, so you must be prepared to accept the fact you could still lose money in the end.

Tip 2: Many factors impact performance

With Brexit dominating headlines for so many years investors may be forgiven for believing that this is a key factor dictating UK stock market performance. Yet there are many factors to consider, not least the pandemic and its effect on the economy and the potential impact on share prices of November’s US presidential elections.

The reaction of the stock market often comes down to whether any particular news improves or dents investor confidence; a shock news story such as Donald Trump’s coronavirus diagnosis for example, that no-one saw coming or a drugs company finding a vaccine against coronavirus is perhaps more likely to have a dramatic impact.

Tip 3: A sterling slump isn’t necessarily bad for investors

Sterling has been on a roller-coaster ride since the Brexit vote, swinging in value depending on the mood of markets over what exit deal would eventually emerge between the UK and EU. Yet, a weaker pound doesn’t have to be bad for the UK stock market.

Many of the UK’s large, multinational companies listed on the FTSE 100 make a large chunk of their money overseas. A weaker exchange rate is of benefit to these companies, and their investors, boosting their profits when they are moved back into sterling.

Conversely, a strengthening pound may result in profits made overseas by UK companies are reduced when shifted into sterling.

Tip 4: The benefits of diversification

The UK economy plays a small role in global investing. If investors take a broad and diversified approach by investing in different geographical areas, the highs and lows of Brexit and what follows should hopefully have limited impact. After all, companies solely focused on the UK ideally only make up a proportion of a diversified mix of investments.

Taking a global approach means investing in a wide range of stocks and other assets (e.g. developed government bonds, high yield credit, emerging market bonds) across world markets, as part of a diversified basket of investments. This could also potentially help to minimise the impact of stock market shocks on home soil on your nerves, and your returns. While one region may suffer a fall, gains elsewhere may offset these losses.

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