Some Brexit thoughts

A client contacted me yesterday asking for my view on the impact of Brexit on portfolio valuations. In particular, he wondered whether a “no deal” outcome would mean a devaluation for Sterling and therefore whether USD denominated investments may be wiser.

Given that he is unlikely to be the only person thinking the same, I decided to share my response here.

In theory “no deal” could mean weaker Sterling, at least in the short term. However there is also the fact that any outcome, even a “no deal” outcome, would at least give some clarity which would be welcomed by markets.

The thing that markets hate the most is uncertainty. It is therefore not impossible that Sterling could strengthen as a result of “no deal” purely because markets at least then know where things stand.

Boosted earnings

If Sterling did weaken however, it would be good news for many British companies as they generate a large part of their revenue outside the UK.

We saw this when Sterling dropped after the result of the Brexit vote was announced on 24th June 2016; UK stocks subsequently performed strongly because it meant that their earnings in GBP terms would be boosted.

Currency of valuation and currency of denomination

It is important to distinguish between the currency that an investment is valued in and the currency that it is denominated in. UK stocks are valued in GBP and denominated in GBP (as mentioned above, they are still influenced by their earnings being generated in other currencies).

A global equity fund however could be valued in GBP but the assets could be largely non GBP. As the UK only represents 7% of global equity markets, then a globally diversified fund isn’t likely to be greatly affected by weaker GBP even if it is valued that currency.

Finally, investments don’t always react to major events in the way that we would expect. Sometimes they wobble temporarily and then simply continue on their trend. This is a good article showing how US markets have reacted to major events such as Pearl Harbour, JFK being assassinated, Watergate etc.

In conclusion, I don’t think that anyone really knows what is going to happen to investments as a result of Brexit. Therefore, in my view, the most sensible approach is to have a portfolio that is well diversified across currency, geographic sector and asset class. 


Further reading

Do your investments suffer from home country bias?

Impeachment? Markets don’t care