The Dangers of Brexit
Given the unprecedented nature of Brexit, many investors are becoming cautious in their approach, which possibly means they may be inclined to invest elsewhere, which is no doubt influenced by the noise of daily politics.
Yet, the truth is that the Brexit uncertainty is well recognised, so while people are confused on how to
price it, we have reason to believe it is a fear-driven response. Here are the typical risks that are driving such fears:
What people are seemingly scared of?
A lack of confidence in the U.K. economy could result in capital outflows and reduced investment.
- The labour force could fall due to a European exodus, where household consumption could decline, lowering domestic revenues.
- Exports to Europe could be hampered by higher tariffs, and imports could become more expensive due to a cheaper pound sterling.
However, a lot of analysts are considering the downside risk Brexit could have by looking at company’s profit margins?
- Profit margins could reduce on the back of reduced sales and higher import costs.
- Dividends could become unsustainable at current high levels.
- Stocks may then be de-rated, which could increase the cost of an equity.
While nothing is certain, there is sufficient reason to believe that a prolonged downturn in the stock-market is unlikely. However, a short-term downturn is possible following Brexit. Furthermore, certain analysts think that the impact of a temporary but possibly severe impairment to fundamentals would still offer sufficient return for risk with a positive net outcome under most scenarios. This is especially true for the U.K. Companies, as they would benefit from positive currency fluctuations.
How likely are trade wars?
Some investors seem spooked by the recently announced tariffs and the possibility that all of this may lead to an ugly trade war. The subject has clearly grabbed attention and headlines as the Trump administration began an effort to renegotiate terms with its trade partners. Retaliatory measures from all sides raised the probability of an extended conflict that may hamper global economic growth.
It is unlikely that the announced tariffs currently present a major threat to global economies. The U.S. economy, in particular, is large enough and domestically oriented enough to not feel too much pain from current measures.
Of course, trade tensions and tariffs could become more severe and, at worst, tip the global economy toward a recession. But getting too focused on a worst-case scenario ignores the possibility that tensions cool, compromise is reached, and investors go back to focusing on strong earnings. It wasn’t too long ago that presumed nuclear conflict on the Korean peninsula sent tremors through global markets, but that seems to have been laid to rest for now.
Should Investors React?
The short answer: no. It would be prudent for longer term investors to focus on long-term valuations (the true and durable value of an asset class), rather than its market price. Having a long-term perspective makes the short-term outcomes surrounding the current trade issues less concerning.
Investors who trade on emotion and market reactions are more likely to sell when markets are low and buy when they’re high. We advise our clients to do the opposite by sticking to your principled approach to investing, which is designed to keep you rational in a sometimes-irrational world.
Remaining in your Investments?
The best thing an investor can do when contemplating change is to reflect on their goals. Would any investment change align with your original investment plan or strategy in respect of your agreed goals?
The key question to ask is whether anything has fundamentally changed since setting the original strategy or whether it’s just that you are disappointed with the progress towards your goals.
- If something has fundamentally changed, the next question to ask is whether you can clearly identify what has changed. Write it down, then balance this by writing what it might mean if you’re wrong. This should include any misjudgment risk as well as the added costs if you decided to change investments. You will often find that the change you desire is not necessarily going to increase the probability of reaching your goals.
- If it has “just” disappointed you, but nothing has fundamentally changed, the likely best option is to remain as you are. By remembering that investment markets never move in straight lines, you may avoid the perils of trying to time the market.
It is helpful when investing to remember the time-tested adage ‘Time in the market, rather than timing the market.’
It would also be helpful to remember your original objectives and reasons for investing before making any impulsive decisions that could potentially undermine these in the future.
We believe investors should remain focused on the medium to long term, investing over ‘time’, rather than trying to ‘time the market’.
We continue to assess the quality of any investment opportunities which come about as the result of our investment process and strict fund selection criteria. A long-term outlook when investing is clearly desirable, as short-term expectations can turn out to be unrealistic where events cannot be anticipated.
Active management remains important and generally volatility can be partially mitigated by diversifying investments across a broad range of asset classes that include equities, commercial property, fixed interest securities (bonds) and cash to spread risk even further.
For clarification of any points discussed above and any future independent advice regarding your own financial planning, please do contact us on 01626 833225 or email firstname.lastname@example.org
The views and opinions contained herein are those of Loughtons Independent Financial Advisers and may not necessarily represent views expressed or reflected in other economic communications, strategies or funds.
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