ASSESSING THE IMPLICATIONS OF A NO-DEAL BREXIT

With the increasing political challenge and uncertainty surrounding the ongoing Brexit negotiations, the risk of the UK crashing out of the EU without a deal in March next year has become more probable than previously expected. Given the potential impact on investors, our Insight team outlined their intention to assess a “nodeal” scenario. Our analysis shows that well diversified investment plans are relatively robust to a “no-deal” Brexit in sterling terms. However, if an investor or fund manager wished to bet on a “No Deal” Brexit, superior returns would likely be achieved by diversifying away from Sterling (including Cash, UK Equities, UK Corporate Debt and UK Gilts) during the uncertain period ahead.

We have published a report (attached in the email) to help clients understand what a No-Deal scenario would mean for investments and asset allocations from the prospective of our Insight asset model portfolios.

A No-Deal outcome would cause severe disruptions to trade between the UK and EU. This could cause the Sterling to plunge by another 12.5% against the euro and cost the UK 8% of its GDP over a 15-year period. A No-Deal outcome would also be bad news for wage growth and job security, while higher tariffs and the weaker Sterling would mean higher inflation for UK consumers. However, we assume that, whilst inflation expectations would rise, the Bank of England would probably be less willing to raise interest rates in the short term amid weak growth. This implies lower real interest rate expectations low.

Considering that 70% of the FTSE 100’s revenues are derived abroad, the impact on UK shares would be small and perhaps even positive in Sterling terms. Returns from property investments, however, would suffer, even with low interest rates and a weak Sterling.

EValue does not intend to change our standard recommended portfolios on the back of this impact analysis but will continue to monitor developments through our normal quarterly update cycle. Should events unfold requiring more immediate action, our Insight team will update clients accordingly.

Jack Evans, Asset Director at EValue, commented: “The uncertainty in Brexit negotiations raises serious concerns for UK investors looking to accumulate or protect their long-term savings. Should the market anticipate a no-deal scenario, the effect will be mitigated by portfolio diversification outside the UK and also because foreign earnings underpin UK Equity returns. We are not at this time advocating any emergency reallocation in our model portfolios which are well diversified and appropriate for long term investors but will monitor further developments.”