Investing through Brexit

What we think

While we also see an extension as increasingly likely, history shows that political negotiations tend to resolve themselves at the last possible moment.

Sven says, “We are still expecting a deal on the assumption that no-deal is simply not in the interest of either side. Like any political negotiation, it could go right to the very last second, and we could see an extension to the deadline. But we think no-deal remains unlikely.”

We have seen this kind of brinkmanship in Europe-based negotiations before – around the Greek debt talks a couple of years ago and, more recently, the controversial Italian budget deficit. In both cases, both sides stuck implacably to supposedly irreconcilable positions – right before arriving at a mutually acceptable compromise once the deadline arrived.

The road marked ‘Brexit’ is arguably bumpier than those examples, but we think it’s heading in the same direction.

What we’ve done

As active portfolio managers, we’ve been making changes to our investments in light of Brexit – looking for the opportunities as well as ways to cushion potential blows.

Firstly – the opportunity. We’ve taken a position in UK mid-cap stocks after prices hit a three-year low in the December sell-off. When Brexit uncertainty clears, we expect these companies – which tend to focus on the domestic market – to get a boost from a surer economy and stronger sterling. They also have a healthy dividend yield – 3.1%, compared to 4.4% in the FTSE 100, and 2% for America’s S&P 500, as at the end of February.

Secondly – the cushion. We bought US Treasuries to put a safety net below potentially higher levels of equity volatility around the world, and as a result of the US Federal Reserve’s more cautious approach to raising interest rates. We also chose Treasuries instead of UK government bonds because the current Brexit dynamic means gilt prices are much more susceptible to sudden shifts.

What happens next

Developments on the no-deal scenario and the possible extension remain the two key points to watch out for this month.

“Any further evolution that makes a no-deal scenario less likely will trigger a stronger sterling and should benefit UK domestic stocks, while gilt yields and large cap UK equities will partially be driven by global markets,” explains Sven.

“Meanwhile, the Bank of England will continue to watch for Brexit developments and the agreed length of any extension period if that’s what happens. It seems reasonable to assume at this point that any short extension will not alter their current ‘wait and see’ attitude before deciding on a potential interest rate hike.”

When investing, 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.