{"id":842,"date":"2016-06-23T09:56:54","date_gmt":"2016-06-23T09:56:54","guid":{"rendered":"https:\/\/www.connectum.no\/?p=842&lang=en"},"modified":"2017-08-14T12:11:06","modified_gmt":"2017-08-14T12:11:06","slug":"brexit-keep-calm-and-carry-on","status":"publish","type":"post","link":"https:\/\/www.connectum.no\/en\/brexit-keep-calm-and-carry-on\/","title":{"rendered":"Brexit – keep calm and carry on!"},"content":{"rendered":"

[vc_row css=”.vc_custom_1489784674124{margin-right: 0px !important;margin-left: 0px !important;padding-right: 0px !important;padding-left: 0px !important;}”][vc_column css=”.vc_custom_1489784666864{padding-right: 0px !important;padding-left: 0px !important;}”][vc_column_text css=”.vc_custom_1502712664837{margin-bottom: 20px !important;}”]In this brief note, we raise a number of potential risks that exist and how these are mitigated, to a large extent, by the current structure of your portfolio. We do not seek to analyse the debate, provide our slant on it, or steer you in any direction.<\/p>\n

How did we get to this?<\/h3>\n

There is no doubt that the decision that UK voters will make is a big one, with material consequences for the long-term nature of who\/what we want to be as a nation. It is by no means an easy decision and is made no easier by the polarised positions of both camps that has resulted in unedifying personal attacks, the loose use of data, personal ambition and party division.<\/p>\n

Today\u2019s referendum is a long way from the heady days of 1973 when the UK \u2013 urged on by Ted Heath \u2013 became a fully paid-up member of the European Economic Community (EEC), by an emphatic margin of two to one. It may surprise some that back then those pushing for entry were the Tories and it was the Labour Party that was riven with in-fighting. Thatcher\u2019s EU budget rebate in 1985 \u2013 which still rankles with some \u2013 and short-lived membership of the Exchange Rate Mechanism in 1992, were early milestones in the up-and-down relationship between the UK and the EU.<\/p>\n

Despite the EU\u2019s faults and challenges \u2013 not least the future of the Euro and coping with mass migration \u2013 it is easy to overlook the fact that, in all of its guises since the Treaty of Rome in 1957, the EU has been central to co-operation and peace between the nations of Europe, extending the principles of democracy and tolerance to its expanded ex-Soviet bloc members. That in itself is quite an achievement not to be dismissed \u2013 or risked \u2013 lightly.<\/p>\n

How does all this relate to your portfolio?<\/h3>\n

Much has been written in the financial media about the need to position investor portfolios for a vote to leave (Brexit). Yet that presupposes that we, as your advisers (or any other investment professional for that matter) can, in some way, foresee what is going to occur and thus reposition your portfolio accordingly. It also presupposes that BREXIT is a bigger risk to your portfolio than, say Putin\u2019s increasing militarism, the enduring tragedy of events in the Middle East, North Korea\u2019s nuclear sabre rattling, Donald Trump becoming the next US president, or some other geo-political event or natural disaster that we cannot foresee.<\/p>\n

When we established your portfolio, we did so knowing that any number of such events would be likely to occur with monotonous regularity over the time you will be invested. The aim therefore is not to try to reposition the portfolio for each such event \u2013 remember that the market\u2019s view of potential outcomes is already reflected to some extent in market prices \u2013 but to build a robust, well-diversified portfolio to weather all investment seasons, with an appropriate level of risk for you, and to stay the course.<\/p>\n

That said, we believe that there are short-term market risks to a vote to leave the EU that are worth understanding, which we highlight below:<\/p>\n

Risk 1: Greater volatility in the UK (and other) equity markets<\/h3>\n

It is certainly possible that the UK equity market could suffer increased volatility \u2013 including a market fall \u2013 as the market tries to come to terms with what this means for the UK economy and the impact on the wider global economy.<\/p>\n

Risk 2: A fall i Sterling against other currencies<\/h3>\n

Much has been made of a fall in Sterling against other global currencies, which has already been reflected to some degree in exchange rate movements since the start of 2016. For example, Sterling fell from 1.48 against the US dollar to 1.45 and from 1.36 to 1.27 against the Euro but has subsequently recovered some ground.<\/p>\n

Risk 3: A rise in UK bond yields (and thus a fall in bond prices)<\/h3>\n

The Chancellor, amongst others, has stated that the cost of borrowing might rise as investors looking to hold bonds issued by the UK Government (and UK corporations), will demand higher yields on these bonds in compensation for the greater perceived risks of the uncertainty surrounding the decision to leave the EU.<\/p>\n

Looked at in isolation, these may appear to be significant risks. Yet as part of a well-diversified and sensibly constructed portfolio, their impact can be greatly reduced.<\/p>\n

Mitigant 1: Global deversification of equity exposure<\/h3>\n

It is worth remembering that the UK economy represents less than 5% of global GDP, and its equity market is around 6% of global market capitalisation. The stock market is also not a direct proxy for the UK economy as many of its constituents have considerable overseas operations, such as HSBC and Shell. In fact, around 70% of earnings from FTSE 100 companies come from overseas.
\nYour portfolio has well-diversified exposure to other developed equity markets (e.g. the US, Japan, Germany and Australia) and emerging markets economies and companies (e.g. Taiwan, China, India and South Korea), which will help to mitigate any UK-specific market fall. Equity markets as a whole might be volatile, but that is the nature of equity investing, and being diversified will help. Changing the mix between bonds and equities would be ill-advised. Provided you do not need the money today \u2013 which you do not \u2013 you should hold your nerve and stick with your strategy.<\/p>\n

Mitigant 2: Owning non-Sterling assets and currencies in the growth assets<\/h3>\n

In the event that Sterling takes a beating, it is worth remembering that the non-UK\u00a0equities that you own come with the currency exposure linked to those assets. For example, owning US equities comes with US dollar exposure, as we do not hedge the exposure out. If the Pound falls e.g. against the US dollar, these US assets are now worth more in Sterling terms, thus mitigating the fall in Sterling to some extent. In short, a fall in Sterling has a positive effect on non-UK assets that are unhedged.<\/p>\n

The bond element of your portfolio has is hedged into your home currency to avoid mixing the higher volatility of currency movements with the lower volatility of short-dated bonds.<\/p>\n

Mitigant 3: Owning short-dated, high quality and globally diversified bonds<\/h3>\n

The primary defensive assets in your portfolio are short-dated, high quality bonds, diversified on a global basis. Short-dated bonds are less volatile than longer-dated bonds and their prices will be less affected by any rise in yields. High quality bonds, tend to be where money flows to at times of equity market trauma, driving yields down and prices up, at least in the short term. Your bond holdings are also diversified across a number of different global bond markets, which mitigates the risk of a rise in UK yields (and thus falling prices), as the cost of borrowing in other markets will not be impacted in the same way.<\/p>\n

Sticking to your strategy<\/h3>\n

At times like this, it is easy to become overly concerned about near-term events, such as the outcome of this referendum. Your life as an investor will inevitably be punctuated by an ongoing series of near-term events, making life continually uncomfortable, unless you view them in context. Below we reiterate a few thoughts that might be helpful. Remember:<\/p>\n

\u2022 The value of your portfolio simply tells you how much money you would have if you liquidated your portfolio today, which you have no intention of doing. You only make actual losses if you sell assets. If you don\u2019t sell them, they remain in your portfolio to deliver future returns.
\n\u2022 Your portfolio has a well-thought-out structure \u2013 as we explored above \u2013 that has been designed to provide you with the best chance of a favourable long-term investment experience. Stick with it.
\n\u2022 Some assets will be doing well at times and others less so. No-one knows which asset(s) it will be at any point in time. Markets work well enough to make jumping from one asset class to another a dangerous gambling strategy.
\n\u2022 Your adviser cannot control what markets do, nor can fund managers. Markets will do what they do.<\/p>\n

Whether your inclination is to remain or leave, try not to worry too much about the consequences on your portfolio as you are well-positioned to weather any storms. \u2018This too shall pass\u2019, as the investment sage John Bogle has said many times before at other seemingly concerning times.<\/p>\n

 <\/p>\n

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