Brexit: Reasons not to be worried
What are you thinking about right now? Maybe you’re thinking about work – some project, deadline or upcoming meeting? Or something more personal - moving house, a new car, or maybe just what you’re doing this weekend?
Beyond these, how often do you actively think about global events? Unless there’s something that you are deeply interested in, chances are newspaper headlines will have a big effect on what’s stealing your attention. These days, it’s not just newspapers but also what’s appearing on your social media network – trends on your Twitter feed or posts shared on your Facebook.
Whatever old or new media, it can be hard to make the distinction about which event is actually important and which is not. After all, if you’re thinking about it, it must be important. Right?
The current coronavirus situation is a good example of when the headlines and reality are closely aligned. It’s hard to deny that it has touched everyone’s lives in one way or another. I can speak from experience as I write this article from my home rather than the 7IM office.
But more often than not, the reality is very different to the headlines. For UK-based globally diversified investors, Brexit falls into this category. Phrases like “economic blockades” or “the break-up of the UK” in the headlines (or Facebook feeds!) are hard to ignore. But are they relevant? Usually not. Here are three reasons why:
1. Brexit has already happened
As we approach another negotiating deadline, it’s easy to forget the most important aspect of Brexit – we have already Brexited! As of 11pm on January 31st 2020, the UK formally left the European Union.
The week following the referendum result in 2016 saw the pound fall nearly 15% - the July 2016 low was $1.28. Since then, we have seen all types of headlines regarding four eleventh-hour negotiations, three Prime Ministers, two election campaigns, and multiple threats of a ‘No Deal’. They have all come and gone, with much outcry and panic. And yet, over four years later the pound, at the time of writing, has ended up at … $1.28.
It’s easy to believe that this time may play out differently. But remember the job of the headline writers, and Twitter algorithms, is to make us think that! However, scratch beneath the surface and all the ingredients are the same: the backbench of the Conservative Party leading calls to walk away, a Prime Minister needing to sound tough in negotiations, sources from the EU claiming that this time it doesn’t care what happens to the UK. We think these ingredients will end up with the same fudge we have seen before.
2. Global investors are reading other headlines
We like to think of markets as being able to see through the headlines – but often they can be just as reactive as people. However, in this case the headlines that are grabbing the attention of global investors are very different to the ones the average UK-based investor will be.
A simple rule-of-thumb is: size matters. More specifically, the size of the economic impact. Where does Brexit sit on this scale? It can seem important, after all, the UK is the sixth biggest economy in the world – this sounds big.
However, the UK is smaller than India. And did you know that India is on the brink of financial crisis? For the last few years, its banks have been sitting on a growing pile of loans that may not be paid back and the coronavirus recession is threatening to unravel its banking system. The reason you don’t hear about that is because it just isn’t big enough. Nor is the UK.
The truth is, unless it’s affecting the US or China – the coronavirus, US elections and the trade war – it just doesn’t matter to global markets.
3. The UK isn’t the UK
This isn’t to say Brexit isn’t important to some. Just like the Indian financial situation will be important to investors in Indian banks, some UK investors will be affected by Brexit. But context is important. Most UK investor money is in the FTSE 100 - the stock index of the largest companies listed in the UK. But the largest three companies in the index - GlaxoSmithKline, AstraZeneca and HSBC - have very little to do with the UK.
But it’s not just the top three. Putting together all hundred stocks, over three-quarters of their revenues come from abroad. This means, what matters for UK investors is actually pretty much the same as what matters to global investors. The London-listed global commodity producers and pharmaceutical companies will care more about what happens with the coronavirus than they do about Brexit.
7IM portfolios are diversified away from the UK
On paper, 7IM Balanced portfolios have 18% in UK equities. In reality, most of these companies are listed in the UK but are active across the world. In sales terms the 7IM portfolios have a mere 4% exposure to the UK. This limits the impact of the UK’s future trading relationships on returns.
We also have UK corporate bonds at 5% of balanced portfolios. But the top 10 issuers in the asset class include EDF, AT&T, Wells Fargo and Rabobank … these non-UK companies will continue to service their debts, even in a ‘No Deal’.
And finally, one of the most important elements of a diversified portfolio is the protection on offer from foreign currencies. The Japanese yen and the US dollar tend to increase in value, as investors head for safe and stable nations. In specific situations such as Brexit, when the pound falls, it almost doesn’t matter where else in the world you go. On the night of the referendum in 2016 the dollar and yen were up more than 10% vs the pound, but so were the Australian dollar, the Brazilian real and the Malaysian ringgit.
When it comes to the potential for a ‘No Deal’ or other general UK uncertainty, our balanced portfolios are well protected, with over 30% in foreign currencies. If UK uncertainty ratchets up this is likely to weigh down on sterling but actually help portfolios.
When it comes to portfolios, it’s best to not overthink the UK headlines. The idea of global multi-asset portfolios is to be diversified. They are not vulnerable to UK uncertainty. So while you may worry about UK politics, you don’t have to worry about its impact on your 7IM portfolio.