In March I wrote a piece about Brexit for Ftadviser.com (Brexit: a leap in the dark, 10 March 2016) which goes into some of our thoughts around the issue. In summary at the time the PortfolioMetrix view was:
- The Brexit debate (whether to leave or not) itself was fiendishly complex.
- There was a lot of uncertainty about which way the British people will actually vote.
- Clearly evaluating how the results either way will affect different investments was extremely difficult too and could not be predicted with certainty.
- In light of the ambiguities above, while we spent a good deal of time evaluating how best to tweak portfolios to best respond to new information as became available, we were focusing most of our efforts in making sure that portfolios were diversified (across difference countries, regions, sectors and funds) so that they could handle both possible vote outcomes (leave or remain) and also the myriad of eventualities that could result from each vote outcome.
At the time polls were roughly evenly split and the bookies had a 31% chance of the UK voting for Brexit. Since that article there has been some evolution in events and the debate:
- The question around whether to leave or stay is still complex, although a fragile consensus has emerged that the Remain camp has the stronger argument in an economic sense whilst the Brexit camp are probably stronger on the more powerfully emotive issues of independence and immigration.
- There is still a lot of uncertainty around which way people will vote although the polls now favour Remain and the bookies have cut the odds of Brexit to about 15%.
- Clearly evaluating how the results will affect individual asset classes is still tricky, although there is pretty general consensus that a Brexit vote would cause a pretty sharp fall in the pound (particularly after recent rallies) and there is the expectation that it would be bad for domestically focused UK companies.
Perhaps things are a bit clearer than when I originally wrote the article, but not by too much.
The one thing we think hasn’t changed at all is the correct approach to take from an investment portfolio point of view. Happily, this is our default position which is to make sure that portfolios are diversified (across difference countries, regions, sectors and funds) so that they can handle both possible vote outcomes (leave or remain) and also the myriad of eventualities that could result from each vote outcome.
Crucially, given we hold a blend of UK and overseas equities in portfolios, we are also diversified by currency (the most obvious risk associated with the EU referendum). Overseas holdings, in non-sterling currencies, to some extent protect clients in the case of an Out vote and a sharp fall in sterling, whilst our UK equity holdings ensure that in the event of a Remain vote, clients don’t suffer the opportunity cost of being completely left behind in the event of a sterling and domestic focused equity rally.
Pragmatic diversification is perhaps a less “sexy” strategy than the (over) confident “put all your chips” on red (leave) or black (remain) that some market commentators espouse, but we are looking after client’s long term savings and our first job is to make sure that if the unexpected happens (as it so often does), client portfolios aren’t irreparably damaged by short term events.