What does brexit mean for investors?

09 January 2019

Firstly a disclaimer: Given the pace with which the Brexit negotiations are moving at the time of writing, it is very possible that by the time you read this, the landscape surrounding the potential outcomes will have significantly changed, thus potentially rendering one or more of the outcomes detailed below to be irrelevant. Here’s hoping I am not too far off the mark.

Brexit article infographic

The purpose of this article is to discuss the potential outcomes on three specific assets of equities, government bonds and commercial property, alongside potential impacts on Sterling and in turn, consider what all this could mean for investment strategies in 2019.

So let’s start with the simple stuff. There are three broad outcomes to Brexit, which I like to describe as follows:

  1. A jolly good show
  2. Oh gosh!
  3. Let’s have a cup of tea and carry on

A jolly good show
This is the scenario where everything is organised, agreed upon and signed up to by March 2019. Regardless of your view on Brexit itself, this is clearly the best potential outcome of the Brexit negotiations. 
Unfortunately, given how little has been agreed to date, it seems highly unlikely that there will be enough time left for this outcome to be achieved and therefore I will not explore this outcome any further here.

Oh gosh!
This reflects the ‘No Deal’ outcome. Until there is a deal in place, the possibility of no agreement being reached remains. Should this end up being the case, it would very likely result in serious economic and investment disruption, certainly over the short-term.

Potential impacts include but are not limited to:

  • Sterling depreciation: due to the perceived increased uncertainty.
  • An uncertain impact on equities: a fall in Sterling is likely to support share prices of the FTSE 100, where a lot of earnings come from overseas and hence become more valuable. However for the more domestically focussed stocks outside of the FTSE 100, the likely outcome would be an environment of falling share prices.
  • Uncertain impact on government bond values: a potential de-rating from credit agencies would reduce values and increase yields. However, the significant uncertainty could lead to a flight to quality/safety which could result in materially increased demand that in turn would increase values and reduce yields.
  • Commercial property values are likely to be negatively impacted: why would companies commit to any significant property investment in this scenario? Although, should Sterling depreciate, assets would look more attractive to overseas investors which could drive up demand from outside of the UK which would counteract the lack of UK based property investment.

As every day passes this outcome becomes seemingly more likely. However, history tells us that as with other similar ‘cliff edge’ political deadlines that have been seen in recent years (think Greek financial crisis or US fiscal tax/spending agreement), some sort of resolution tends to magically be found in the final days, or indeed hours, leading up to such an event. Ultimately a ‘No Deal’ scenario is not in anyone’s interest and it is therefore expected that this is an unlikely outcome; however it cannot be ruled out until an agreement is reached.

Let’s have a cup of tea and carry on
This is an outcome that lies somewhere between the two options above. The variation of outcomes within this scenario is huge and so it would be silly to try and be specific. The general gist is that the impact of the
agreement is unlikely to be immediate, and there will potentially be a significant transition period required to finalise the finer details. In the short-term, the impact is likely to be limited: we will carry on living our lives as normal, will produce the same goods and services, eat the same food and buy the same products. Similarly, as a nation, the UK will continue over the short-term with the same laws, regulations, taxes, military alliances (and spending) etc. The impact of any deal will take time to manifest itself – the UK is not going to change overnight.

The potential implications of such a scenario
from an investment perspective could be:

  • Sterling appreciation: due to the perceived reduced uncertainty.
  • Equity uncertainty: opposite of the ‘Oh gosh’ scenario with the added complication that having some sort of known Brexit outcome may counteract some of the currency impact.
  • Uncertain impact on government bonds: having any sort of agreed deal is unlikely to result in a change to credit agency ratings depending on the type of deal, there could again be a flight to quality/safety however equally there could be a risk on rally more generally which would have the opposite effect due to reallocations away from government bonds and into risk on assets.
  • Limited impact on commercial property values: as this is a longer-term investment, it is likely that even in the event of a Brexit agreement, property investment could well be delayed until the outcome of any agreement is more certain.

What does this mean for investing in 2019?
Given it is difficult to accurately predict the outcome of Brexit (due to the number of variables and the lack of information available), a guess would be dangerous. Investing based on a predicted Brexit outcome would effectively be gambling and gambling in our opinion is not a prudent investment strategy!

Indeed, the reality is that there is only one certainty about the Brexit process: uncertainty.

If you are unable to take a strong view based on an investment rationale (and assuming you don’t want to gamble) then the best option has to be to revert to a diversified portfolio of investments that is likely to perform broadly in line with the wider market regardless of the outcome of Brexit. i.e. be boring – there is nothing sexy or clever about this as a shortterm strategy. Investing is largely a long-term pursuit, so why not be patient and wait for the outcome of Brexit to largely be known.

What is our plan?
Setting an investment strategy that is immune from the impacts of any Brexit outcome is near impossible. Therefore our intention is to continue to monitor information and newsflow – having the ability to react in response to developments will be key. However when monitoring, it is important to be careful not to make knee jerk reactions that can have negative short (and potentially long) term impacts. Our expectation is that the road will continue to be rocky, winding and fraught
with potential political uncertainty.

This certainly feels more like the end of the beginning than the beginning of the end.

JLT Employee Benefits Brexit article infographic

For more information contact hal_cook@jltgroup.com