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Brexit: What's the Coutts investment view?

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Summary

Our view on Brexit for investors.

2 min read

As the world watches the Brexit negotiations with bated breath, we share our latest investment view on the possibilities, challenges and unknowns for UK investors. The views in this piece reflect our perspective as an investment manager only.

How is our asset management team getting ready?

Fundamentally, we’re holding steady, waiting for the facts and sticking to our long-term plans until we know more.

Even without Brexit on the horizon, we constantly monitor markets and our portfolios, and always stand ready to make changes if we see significant shifts. For example, earlier this year we moved money from emerging markets into developed markets – noting the potential for underperformance brought on by a rising dollar and superior earnings in the US.
 

Market expectations

Several investment banks have published their views on how likely each of the possible outcomes are. Some have said the probability of a ‘no deal’ Brexit is around 20% while others think it’s closer to 15%.

We think those numbers are sensible, but there is an argument that there could be an even lower chance. Why? Because history has shown that the European Union (EU) does make deals, albeit often at the last minute. We’ve seen plenty of cases where countries have had issues with the EU – Greece, Portugal, Ireland and Cyprus – and every time an agreement has been ironed out.

Commentators have also said the probability of a deal which leaves the UK still relatively aligned with the EU – or a ‘soft Brexit’ – would be around 60%.

Both UK shares and commercial property have rebounded since the EU referendum

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The UK is consistently ranked as one of the easiest countries in the world to do business

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Its unemployment rate is currently at its lowest level for over 40 years

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Market reactions

Any comment on how markets might react to the various negotiation outcomes can only be pure speculation. But we can look back at what happened in the markets after the EU referendum and other ‘lower probability’ events like President Trump’s election in 2016.

In both cases, stock markets fell but soon recovered – in the case of Trump’s election it happened within the same day.

In the immediate aftermath of the EU referendum, three areas were hit – sterling, UK domestic stocks and commercial property. Of those, UK shares and commercial property have completely rebounded, while sterling remains depressed. Commercial property, which we have exposure to in our portfolios, is currently performing well. So far this year, we are seeing returns from our UK commercial property funds of around 4%.

If history does prove to be any guide, and if markets reacted similarly following a no deal scenario, then we might expect to see sterling weaken further which could boost the FTSE 100 and be good for sterling-based investors. The currency’s weakness benefits our portfolios as a large part of our UK exposure comes from the FTSE 100 – about 75% of which gets its revenues from overseas. This means those revenues are worth more when translated back into cheap sterling.

On the other hand, if the negotiations result in a ‘good deal’, we could see UK assets perform better and sterling strengthen – which wouldn’t surprise us as we think the currency is currently undervalued and have been increasing sterling in portfolios.

“Despite Brexit-related uncertainty, there is still plenty to like about the UK.”

A good time to invest?

There’s no doubt that the uncertainty caused by Brexit is casting a shadow over UK markets and capital investments in the country. We simply don’t have visibility of how the negotiations will play out. That said, we believe that a good investment approach in the private client space is not about trying to time the market and wait for the perfect moment, but more about spending time in the market.

Despite Brexit-related uncertainty, there is still plenty to like about the UK. It is consistently ranked by the World Bank as one of the easiest countries in the world to do business – currently seventh out of 190 countries. This attraction to international companies boosts the economy and is ultimately good for the country’s investment markets. Meanwhile, domestically there are also things for investors to feel positive about, such as the UK’s unemployment rate currently sitting at 4% – its lowest level for over 40 years.

It’s also worth remembering that the UK is just one part of the global picture. Overall, global economic growth remains solid, led by a strong US economy, and we see no imminent signs of a US recession which could herald a downturn.
 

What happens next?

We’ll continue to keep an eye on the negotiations and reassess our thinking as new information becomes available. We don’t want to speculate, but we will keep you up to date with our thinking.

Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

About Coutts Investments

With unstinting focus on client objectives and capital preservation, Coutts Investments provide high-touch investment expertise that centres on diversified solutions and a service-led approach to portfolio management. Our investment process is as disciplined as it is creative – ensuring tailored solutions with robust results.

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