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Brexit: Three ways we’re preparing portfolios

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Summary

Investing through the UK/EU split

2 min read

The next chapter in the Brexit timeline could include another general election, so the outlook for UK assets remains unclear. But there are things investors can do to be well-positioned and well-prepared for what comes next.

Here are three examples...

1) Not giving up on sterling

The Great British Pound may have taken a Great Brexit Pounding this year but we still think it has potential and are watching it carefully.

Numerous economic models that try to assess whether the currency is attractively valued show a strong likelihood of recovery over the long term. Some estimates of a ‘fair’ value of sterling see £1 eventually worth US$1.61 – at the time of writing it was actually worth just US$1.24.

Coutts Investment Strategist Lilian Chovin says, “Sterling is undervalued. The currency is likely to stay prone to swings over the coming months, but longer term we see a lot of value in the pound. The fact that our models are producing estimates so much higher than the currency’s actual value reduces the margin for error.”

He adds, “We therefore still like sterling. We have reduced our exposure to it this year to reflect the ongoing uncertainty from Westminster – by selling some UK stocks to buy more US shares, for example. But as nimble investors, we stand ready to change that quickly once the outlook becomes clearer.”

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“Sterling is undervalued.”
Coutts Investment Strategist Lilian Chovin

2) looking beyond the headlines on europe

UK events are obviously just one consideration for global investors – for us, the US and Chinese economies, and US interest rates, are actually far bigger drivers for our portfolios and funds. It’s therefore important to look beyond British borders. 

Take Europe, for example. The region is facing its own challenges, with business confidence in Germany sinking to a seven-year low and political volatility weighing on the Italian economy.

But look a little deeper and opportunity could be waiting in the wings. 

The potential for economic recovery we’re currently seeing in China, if it continues, should have a positive knock-on effect for Europe as the two have such a strong trading relationship. China is the EU's biggest source of imports and second-biggest export market, according to the European Commission. Trade between China and Europe amounts to €1 billion a day on average.

Like the rest of the world, growth in China has been slowing and markets had priced that in. But recent data points to its economy stabilising and potentially even picking up a little, despite the ongoing trade war with the US. The Chinese government has been actively increasing spending and introducing tax cuts to aid the economy. 

Because of these developments, we’ve increased our allocation to European stocks, taking them back to a neutral position.

Lilian says, “There are strong connections across the global economy and stock markets. It’s our job to spot them and act on the opportunities that arise from them. And if China’s recovery continues, that will be good for Europe and good for European companies. The trade war is of course a concern for China, but it should help that the country has become more reliant on domestic demand rather than global trade over recent years.”

 

3) keeping a close eye on bonds

Bonds on both sides of the Atlantic have delivered solid returns so far this year. As at 31 August, the Barclays UK Treasury Index returned 11.3% in local currency terms, while the US equivalent returned 8.6%. 

A word of warning though. US Treasuries and UK Gilts are in different places right now, once again due to the Brexit-related uncertainty. 

“Using our in-house economic indicators, we foresaw that interest rates would fall in the US in light of slowing growth, making the country’s government bonds attractive,” says Lilian. “That’s exactly what has happened since the beginning of the year and our portfolios and funds benefitted."

“But in the UK, the Brexit process can drive Gilt prices in both directions independently of their more traditional economic drivers. That makes UK government bonds harder to evaluate, which is a key reason why we have recently favoured US Treasuries over UK Gilts in our portfolios and funds. And given the recent political developments and potential election, we think this rationale is still the right one.”

Find out more about investing with Coutts and read our most recent monthly investment update and house view.

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.

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