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Investing in the shadow of Brexit

Cleaning up and moving on after the Referendum vote

Fair warning: Very long, but getting less ranty.

While the EU Referendum result has provoked the greatest constitutional crisis for several generations, life goes on.

For investors, markets, and Monevator, that means taking stock of where we’re at and what’s next.

Unfortunately, it’s still impossible to cleanly delineate between the politics of Brexit and the possible investing consequences.

That’s because everything was thrown up in the air by the result.

The Prime Minister has resigned, the Leader of the Opposition has been rejected by his own MPs, and the notional winner of the Leave campaign, Boris Johnson, looked on the morning after like a man who has realized he had the beer goggles on the night before.

Only Nigel Farage seems truly pleased. Frightening.

Debate has ranged across social media, and some people have told me they will never read Monevator again on account of my own responses. The British psyche is frazzled.

Pandemonium was also evident in the immediate reaction of the financial market, which did what your head would do if you shot yourself in the foot.

It screamed.

Was the fastest ever collapse in the pound and the $2 trillion plunge in the value of global markets on Friday proportionate to the resolution of an always close-looking vote?

Don’t know.

Will it last?

Don’t know.

Could it get worse?

Don’t know.

We never really know, of course, and we must be especially humble over the short-term as investors. When I began writing this lengthy post on Monday evening, the floor had come out of the market. As I move to publish, shares have been rallying.

The whipsaw potential of equities, the capacity to dumbfound and turn out a dime – more reason why passive investing works better than market timing for almost everyone.

We’re all uncertain now

The situation in the UK now is uncertainty on steroids. Squared.

Not only have we never been here before – we don’t even know where we are, never mind where we’re going.

“Exaggeration,” you say. “This or that will happen.”

Maybe. But the next person behind you thinks different. And the next different again.

All kinds of outcomes are plausible, and it’s difficult to pick between them. That is one definition of uncertainty.

It’s also a memorable definition of risk:

“Risk means more things can happen than will happen.”

– Elroy Dimson, London Business School

Risk has a price, and the way UK-related shares such as banks and homebuilders were thrown overboard after the vote reflected that.

Much money will be made and lost from these big moves and probably more to come as every development is amplified in a febrile, fact-starved environment. But only hindsight will know what strategy was truly correct.

The immediate declines in markets after the vote tell us is the result was not expected, and that traders and investors took a dim view of the nature of the surprise.

But the falls were not certain proof that a Brexit will be bad for Britain.

And by the same token, the rally that followed is not proof investors are already getting over the likely consequences of Brexit.

The rally could reflect a growing belief that Brexit will not ever actually happen given the delay in triggering its initiation, or that we’ll only half exit, or that interest rate rises are off the table and more QE is coming.

Remember too, we’ll never see the counterfactuals: the alternative universes where a different politician took a crucial phone call from Angela Merkel, or a particular trader decided to resume selling Sterling, so altering the course of history.

A slender 2% majority in an inglorious Referendum that a large proportion of voters seemingly didn’t understand has set the iron dice rolling.

Time will tell where they’ll land.

Whose Brexit is it, anyway?

What the market is always trying to do is discount far-out income streams in an unknown future back to a present value today.

What should we pay for a company today for the earnings it will (hopefully) make in 2025?

That’s one reason uncertainty leads to volatility. Even small changes in the notional numbers theoretically plugged into such calculations alter today’s valuation.

Uncertainty also leads to volatility because – as anyone buying a blind lot at an auction knows – when you don’t know exactly what you’re getting, it’s best to have a margin of safety. A discount.

Of course there’s always uncertainty, and things are always changing.

But now we potentially face big changes. A bunch of things that have been taken for granted for decades could be headed to the history books.

Or are they?

You see, a huge difficulty the markets have in assessing the short and long-term impact of the Brexit on national economies and asset classes is that members of the winning Leave coalition have policy agendas that – like Leave voters – are clearly at odds with one another.

If we’d been given a clear explanation beforehand of what agreed steps would occur in the event of a Leave vote – what exactly would change – then the market could now begin to discount the consequences.

But we weren’t, and so today seemingly anything looks possible.

Some are calling for a second referendum, or saying this one wasn’t even binding. Never serve Article 50, they say.

Referendum-swinging Boris Johnson immediately started making statements that actually, free movement, free trade – it’s all going to carry on as before.

Yet that’s in utter contrast to what much of the country just voted for.

Leave campaign claims are being rolled back faster than you can say: It’s almost as if they were saying anything they thought would get them a vote.

If you point out these sorts of contradictions, some Leave voters protest they didn’t vote for this, they voted for that, and that was the most important thing.

And others will say the opposite.

I understand. Each feels their position is misunderstood or over-simplified.

But the reality is that Leave voters are a motley crew, and you can’t often talk of one faction without inflaming another.

This is difficult enough to deal with if you’re a Remain voter – or a blogger.

But it’s going to be especially tough for EU negotiators.

What exactly is this Leave bloc going to ask for?

The best expert guess: Brexit is bad news

Ex-Prime Minister Gordon Brown has written one of the best post-Brexit pieces I’ve read.

Brown writes:

Already we see the divide between Remain and Leave becoming the centrepiece of the narrative about the British economy.

Remainers feel they have to be pessimists to prove that Brexit cannot be managed without catastrophe, while Leavers present themselves as the optimists, claiming the economic risks are exaggerated.

A referendum that started off as an attempt to paper over divisions in the Tory party has now divided the whole country to its very core, and left us more isolated from our international partners than at any time since the humiliation of Suez.

A diverse country such as ours cannot afford years of the Leave campaign’s inward-looking, anti-immigration rhetoric.

But nor can we make progress through the Remain camp’s tactic of brushing aside the country’s key concerns.

In my opinion, the extent to which the market pain deepens – and translates into real world pain – depends on how far the Brexiteers go in implementing whatever mandate the Referendum gave them.

Particularly when it comes to the free movement of people. Trade is straightforward by comparison (and it’s really not straightforward).

Bodies such as the IFS, the IMF, and the World Trade Organisation all released forecasts ahead of the vote, much derided by the Leave campaign, that warned of a varying long-term hit to our economy from a Brexit.

Forecasts are hostages to fortune of course, but the point is that away from the commendably honestly named “Economists for Brexit” and a few pundits, such dark views were pretty much universal.

The Institute for Fiscal Studies report Brexit and the UK’s Public Finances is a most useful (if sobering) read, since it summarizes research from various other bodies in an attempt to see what it will mean for the UK State. It also studies what other non-EU members that operate within the EU single market pay for the privilege.

You’ll thus get quite a good overview by reading through it.

The following table from page 18 summarizes eight major studies on the potential lasting impact of Brexit:

Table: Of the economy hit from Brexit.

Sorry! I know it’s an acronym soup, but it would take a report to define them all.

Source: IFS

Of the eight studies the IFS looked at, six forecast a negative economic impact of Brexit as their central estimate.

In fact none of these saw any positive impact scenario.

The remaining two studies, by Open Europe and Economists for Brexit, did highlight a potential positive impact. Only Economists for Brexit offered a positive figure as their central estimate.

I suppose it will be interesting to see if any of these bodies produce milder forecasts anytime soon now the Referendum is done and there’s no point exaggerating, as some Leave campaigners alleged was happening. As you’d expect I’m not holding my breath.

A more credible retort is that most forecasts turn out to be wrong, and these will be no different.

True, things may go better. Then again they may turn out to be worse.

Listen, the UK won’t be reduced to rubble – nobody is saying that.

Myriad forces such as AI, robotics, migration, and genetics are pitted against social and environmental challenges that are reshaping societies everywhere.

If we were just talking about feeling a post-Brexit hit in six month’s time, that would be one thing.

But it will very be hard to stand in a British market town in 15 years’ time and envisage what it would have been like with, say, 7.3% higher GDP because we hadn’t Brexit-ed.

I imagine it will seem like we survived fine. We just may not have the higher living standards, superior services, and stronger economy that we’d have had if we’d chosen to Remain.

Or maybe we will. Conceivably it could be better – it’s such an upset that nothing can be entirely discounted.

But the best that economists can offer is their best estimates. Those best estimates are currently very negative.

Penny wise, pound foolish

Not surprisingly given the weight of opinion about the likely negative consequences of the journey we’ve voted for then, confidence took an immediate hit in the financial markets in the wake of the result.

Safe-haven assets (gold, bonds) rose and riskier assets fell, although this impact was masked if you’re a well-diversified UK investor looking at your wealth in pounds on a broker’s screen.

Stuffed with dollar assets, your global trackers increased in value.

However you’re poorer relative to most of the other seven billion people in the world than you were last Thursday, thanks to that same falling pound.

The average Briton has been more than 10% impoverished compared to a similar North American or European, for example.

What about the real world? To what degree will all this political and market uncertainty translate into falling consumer confidence and lower spending?

That’s a critical question, since consumer spending accounts for nearly two-thirds of UK GDP.

And to what extent will real nuts-and-bolts businesses pull in their horns, cut back on hiring, and postpone or look overseas for growth?

Right now, nobody has a Scooby.

I don’t believe a significant proportion of CEOs walked into work on Monday rubbing their hands and thinking: “At last we’re free. Time to start investing to make Britain great again.”

So there will undoubtedly be a short-term hit from the loss of animal spirits, offset for some firms by the currency collapse making their products more competitive.

In time though business will adapt and make new plans. Life goes on.

What will the longer-term consequences be?

What really matters for our economy

I’m not going to specifically run through the various models being kicked around as to how the UK may interact with Europe in the future – the Norway model, the Swiss model and so on – after any Brexit.

You can read good explanations elsewhere.

For one thing, we don’t know which model the Leavers collectively want, we don’t know which model will be permitted, and unless we get a General Election or second Referendum, we’re not going to have any say on it.

So I think this is a time to get to grips with the big potential levers of change.

One day we will have a better idea of exactly what we’re getting ourselves into – whether we can retain easy access to the single market, and on what terms.

But for now I suggest we try to think about the main drivers of UK and European economic growth and returns over the next few years, and how they may be impacted by each option as we’re presented with them.

For me, those main drivers will be: the flows of goods, the flows of services, the movement of people, shifts in global capital and foreign investment, and what barriers or incentives are put in the way of any of that (say via trade deals, policy decisions, tax incentives, and other legislation).

They’re the things I’ll be thinking about personally as I attempt to assess the various options being kicked about by politicians, pundits, and others.

Going back to where they came from

As I said, it’s shifts in the movement of people that I think could have the profoundest short, medium and long-term impact on the UK economy.

If – contrary to that faction of Leavers who now deny it’s the plan – we do indeed pull up the drawbridge, reduce inward migration to tens of thousands, and sooner or later say goodbye to hundreds of thousands of EU migrants who may no longer feel welcome in the UK (and who are even less inclined to stick around in a likely upcoming UK recession) then I believe we’ll face a deeper economic shock, similar to the early 1980s.

This would be a seriously bad outcome.

Now you might protest that nothing has yet changed for EU citizens working here.

But remember we’re dealing with people with hopes and fears, not with robots, let alone with boxes of Spanish tomatoes.

So let me share with you what one of my European friends in London texted to me when asked her feelings on the Friday after the Referendum result.

My friend works in a competitive sector, she’s well-paid, and she is a star in her high-pressure job precisely because she is a stable person who can handle a lot.

She wrote:

It’s a sad day, was without words this morning but after the initial shock I’m prepared to give it a go and see how it goes.

I don’t feel angry, deeply disappointed would be more accurate.

Like someone has pulled the rug from under us, and we are falling.

Am also curious about what crazy development comes next.

You know when you think back in history and go “I can’t believe that happened?”

That’s where we are right now.

I’m in survivor mode right now.

Hard for me to read, but at least she is willing to hope.

I’ve heard much worse from other European friends. More than one has cited Weimar Germany in the early 1930s. That sounds over the top, even to me, but my view doesn’t discount their feelings. And my view won’t stop them acting on their feelings and leaving.

That same super-capable friend emailed me again on Monday:

You know when you asked how I feel with the Brexit?

Well, on Saturday evening it really hit me, I was sitting in a hot bath and burst out in tears over the mess we are in now.

Not just for me, but for all the young people that will suffer under this.

Do these European workers still feel as welcome as before the Referendum result?

Not so much, according to the ones I’ve spoken to.

Remember my European friends are the very capable EU citizens of the sort that even most Leavers want to attract.

They’re not the ones trying to scratch a living in more deprived corners of the UK, where the locals might (perhaps understandably) be less empathetic than me or my London peers.

Thankfully, as far they’ve told me they’re also not facing the upsurge in post-Referendum racism.

So are their fears and emotions just a short-term over-reaction?

Will the hundreds of thousands of talented people who have come to London over the past 20 years and helped transform it into perhaps the world’s most dynamic city – to the benefit of the whole UK – get over it?


Alternatively, they might decide that London isn’t for them any more, or that they don’t want to jump through the hoops of a points-based system, or that they’d rather put down roots somewhere in the EU that isn’t now locked into years of bitter and sometimes xenophobic-sounding negotiations.

Not all of them – but enough that it hits our economy.

This is a certain risk that the Referendum result has delivered.

Imagine the average IQ of the UK drifting down as smarter-than-average people take their tax-generating capabilities overseas. GDP could suffer the consequences for years.

What about the lower-skilled EU workers? Those young – and in the London service industry almost unfailingly pleasant and hard-working – European men and women who pretty much run the South East’s coffee shops and pubs, and who put millions into our economy by spending their time, energy, resources and money here instead of in their native lands?

What happens if a few hundred thousand self-selected motivated young people of gumption decide, even in dribs and drabs, to  seek their fortune elsewhere?

Any mass exodus of migrant money, effort, and talent or sheer numbers will have consequences for UK employment, UK-focused investments, house prices, and the country’s future wealth.

Not good consequences, for the slow ones at the back.

And regrettably, I wouldn’t hold my breath on the native under-employed population rushing in to fill the gap they’d leave.

It’d be nice, but it’s wishful thinking.

Boris’ Britain

On the other hand, perhaps the Boris-backed side of the Leave campaign was just one big wheeze to make him Prime Minister. In that case maybe none of the free movement restrictions that many Leavers voted for will ever actually come to pass.

Seven out of ten MPs supported us staying in the EU, so Parliament might be up for a fudge.

And already some Leavers are suffering from “Bregret”.

Could we just call the whole thing off?

Possibly. But in that case a sizeable chunk of the many millions who voted Leave will feel angry and let down in addition to the foreign workers who already feel angry and let down.

Not a great result for social harmony or confidence in the UK.

Still, statements from some of the more articulate Leavers imply their vote wasn’t actually intended to produce much change.

They want us to remain in the European economic area, trading freely, moving freely, but having regained some crucial (if vaguely stated) legal rights and constitutional prerogatives, as I understand it.

In that case it’s possible that after a minor economic shock that it’s too late to avoid now, things could bounce back fairly quickly.

Interest rates are still at rock bottom lows. Great Britain PLC isn’t a pushover.

However we’ve just knocked ourselves on the head with a sledgehammer, so there will be some reverberations whatever happens.

Things can always get worse

If a stronger Brexit stance is taken – or is forced upon us by the EU – then the worst fears could come true.

Big hits such as the loss of easy access to European markets (i.e. passporting) for UK financial firms, the loss of Euro-clearing in the City, the 100,000 financial sector job losses alone that some estimated would go in a Brexit, higher prices in the shops for all of us due to the weaker pound, and net migration reversing as hundreds of thousands of people go home, sucking the life force out of the economy…

In that scenario I think we can kiss the next decade goodbye when it comes to growth from domestic focused companies.

We could also kiss goodbye to a huge chunk of the taxes derived from the City and other firms with London-dependent business. Unemployment would rise, too. The result would be more austerity, less investment, and so on – even if a new Government decided to abandon tackling the deficit in the emergency, to try to keep the ball in the air.

Things would get worse still if global investors started to doubt the sustainability of the UK state, causing foreign money to draw back from investing here.

Already we’ve lost our last AAA credit rating, following the Leave win.

Thankfully though, gilt yields have not yet reacted with any signs of fear. Owning our own money printing press may save us once again.

Remember the UK depends on overseas capital to cover our current account deficit. A buyers’ strike could see further weakening of the pound, higher inflation, and perhaps the Bank of England operating on a tighter leash.

Interest rates could then conceivably rise to attract capital or curb inflation, just when we would rather be cutting rates or implementing more QE – or even concentrating on delivering a fiscal spending boost.

You want worse still?

If Brexit triggers a speedy disintegration of the European Union (very unlikely I’d say in the near-term) then we’re looking at another global recession, yet more political and economic uncertainty, and a structural long-term hit to global trade and growth.

Maybe also other long-term ramifications, such as the world (and the US) pivoting even faster towards China and South East Asia, too.

A brighter Brexit

Poppycock, you say. You have your own view about what will happen.

Of course. I do, too.

I’m not saying the worst will happen. I’m just discussing the range of tolerable-to-terrible likely outcomes as I see them, and thinking about how the market might discount them and how my investments might respond.

The next person in the queue has a different view to both of us, too.

Again: Uncertainty!

So yes, it’s not inconceivable that from a long-term perspective the UK might benefit economically if we become an even-freer economy, a more neo-Liberal Singapore-style economy, say – albeit at a social cost, and even after the loss of much energy and talent from EU citizens, a drag from costlier trading with Europe, and from potentially paying to access the single market and so on.

We’ll need to look 10 years ahead to the fruits of that though, and I doubt it will compensate for the damage. As we saw earlier, only the Economists for Brexit group predict anything like that. (Ironically, in this scenario the oldest constituents who tended to vote Leave may not be around to be vindicated.)

Still, the majority of economists and City pundits might be wrong. Nobody knows.

In any event I don’t think a positive-Brexit will make much difference to the returns from UK shares, whatever it does for the economy.

Big British firms already operate globally yet operate within a fabulously open and relatively sensitively regulated and lightly-taxed regime, so we’d be talking marginal gains at the company level.

Finally, although it’s beyond my understanding, I’ll note some Leave voters apparently thought a Brexit would take us back to the 1960s, with well-paid employment for millions of adult men in manufacturing, more money pumped into the regions, a diminished London that encourages more UK entrepreneurs and politicians to turn to Hull and Hartlepool, a higher minimum wage, and a stronger social security net. Something like that.

Sounds nice? I’d bet my bottom dollar it is the least likely outcome from Brexit.

The price of sovereignty

I’m trying to focus on the economic issues, but a quick comment on the democratic motives of some Leave voters in the light of the potential costs.

If you truly believe the European project is a bust and that Britain had to get out – whatever the cost – or that we weren’t sufficiently in control of our own laws and practices within Europe, then almost any economic price may be worth paying to Brexit in your mind.

I’m not disputing that. Everyone will see the situation their own way, and put their own price on such concerns.

Money isn’t everything. If I believed the EU was the force for tyranny that some Leavers clearly do, I’d take a recession and even permanently lower growth to get out of it.

(I don’t, but we’ve had that discussion…)

What troubles me is the fantasy that we can have it all – even when that’s been disputed by the vast bulk of credible sources.

We might eventually get most of it, but even there the odds seem against us.

It bothered me in the Referendum campaign, but it really bothers me now, as I’ve learned more about some voters’ motivations. It’s Alice in Wonderland.

If you voted on principle on sovereignty, I can respect that.

But please own the likely consequences.


Was the stock market’s immediate response to the Brexit result rational?

I think so. Certainly it’s understandable.

For whatever reason, traders were not correctly positioned for the Leave side winning.

Given that the weight of expert assessment is that a Brexit will be economically bad news, the market was then forced to work through that disconnect as it tried to factor in the downside from the result.

Markets will keep readjusting until investors hold a portion of UK assets that fits the newly-minted and riskier reality – and at valuations that make sense in that reality, too.

The collapse of the pound, major UK banks falling 30-40% in two days with trading halted, other UK-exposed firms (such as homebuilders) seeing their share prices halved – it was all starting to feel sufficiently pessimistic by Monday evening.

Possibly even overdone. And the sizeable rally since in some very hard hit names may have confirmed that was the case.

Or it could be a dead cat bounce. Or it could be traders betting we won’t Brexit.

Who knows?

I’m feeling this is harder to read than say the Greek crisis or even the financial crisis – and we’re barely four trading days in, so to some extent it’s all noise. Markets will continue to move on speculation.

One way though in which you can see rationality at work is in the post-Brexit performance of the very international FTSE 100 (which makes a lot of money in dollars and other currencies) compared to the more UK-exposed FTSE 250 (in red):

(Click to enlarge)

Overseas earnings will buffer the fortunes of FTSE 100 companies to a greater extent than those in the FTSE 250 because the pound has fallen so far, greatly boosting the FTSE 100’s more international earnings for so long as it lasts.

About 75% of the FTSE 100’s earnings are derived overseas. Since many big blue chip businesses also have operations on the ground in other countries that haven’t (so far) committed self-harm, investors can also buy into operational insulation from a UK recession through multinational UK shares.

But British economy-focused companies have nowhere to hide.

Their share prices melted in the aftermath of the vote. Estate agents, niche retailers, homebuilders and UK banks all lost 30% or more value in the subsequent two days of trading – even though nothing had actually changed on the ground.

That’s the uncertainty and the potential for some truly dire long tail outcomes being discounted (or over-discounted) into valuations. And also some shorter-term traders being caught wildly off-side.

In contrast, those big multinationals rose 8-10% or more, bolstering the FTSE 100.

Of course, the FTSE has still fallen on a global currency basis. The pound has plunged, remember?

If you’re a US owner of Diageo, say, you were not cheering. Your shares were up less than the pound was down versus the dollar. So your holding was worth less than it was pre-vote when converted back into dollars, even after the sterling rout.

But I appreciate few private investors think this way, day-to-day.

Overseas markets and index funds

Most of you rightly aren’t active investors, but passive investors in index funds.

If you’ve been following the advice of my co-blogger The Accumulator or Monevator contributor Lars Kroijer then you had plenty of global equity exposure, whether through regional funds or a global tracker.

These funds have held up well in pound terms.

Indeed, some readers who (often sensibly) do not tend to look below the surface have commented that there was little reaction to Brexit, as far as they could see from their broker’s tally.

But in reality, many smaller UK shares were hit, while most overseas markets floundered similarly to the UK in aftermath of the vote, too.

As of Monday’s close, for example, the FTSE 100 and the US S&P 500 had both taken a 3-4% hit. That was the worst two days for US stocks since last August.

European markets were hit twice as badly.

Again, because the pound fell so precipitously versus most other currencies1 the value of overseas assets soared in Sterling terms, hiding the pain from UK owners.

We’ve written often about the benefits of overseas exposure as a diversifier, not least from a currency perspective. Here it is in action.

Of course if you’re an everyday sort of lower-income Leave voter whose wealth is tied up in cash savings and maybe a house, then you haven’t benefited from this. You’re just poorer.

Still, it’s early days.

Euro vision

The prospects vary for the different developed markets, depending on which of the various scenarios we go down.

With the exception of its financial sector, the US is probably the most insulated from Brexit risk. It’s the most self-sufficient economy of the major countries.

But the US won’t be totally immune to bad scenarios, especially if the dollar strengthens too much as a safe asset, hurting US exporters.

Europe is the most exposed, after the UK.

Britain only makes up 4-5% of the global economy. Whatever the jingoistic claims of certain Leavers, the UK doesn’t swing many dials on the global stage.

But any contagion from Brexit on the Eurozone is a different matter. That would be significant for everyone.

The initial impact in Europe of an upcoming Brexit has been just the same as here – a political impact, and the emboldening (like it or not) of right wing and/or isolationist parties.

But support for concentrating even more power in Brussels is not polling much better across Europe than it did here2 so there could be a Brexit-inspired backlash among EU citizens.

Cue more uncertainty.

Germany, France, and the Netherlands are also due national elections in the next 12 months. If Brexit talks drag on for as long as they surely must, then these elections will give us still more unknowns to think about.

Business uncertainty will have risen in Europe too, with a similar impact for its markets and likely in its boardrooms. Investment postponed, caution elevated.

How will the EU itself get on without Britain? As some Remain campaigners argued, one possibility is that once it’s shed of perfidious Albion’s influence, the EU may become more protectionist, which would have an impact on our own and wider global trade.

The chances of such a Europe cutting a particularly jolly trade deal would obviously seem remote.

Bonds kept their promise

Away from equities, government bonds again showed their mettle, rising during the rout.

We’ve fielded so many comments over the years asking why we include boring old bonds in our Slow and Steady model portfolio, or others pointing out that this or that stock market index has done better without them.

Or in rare cases just calling us no-nothing idiots leading investing lambs to the slaughter. (None of those people ever come back with a mea culpa, incidentally. Do remember that the next time you’re reading such sentiments.)

At various times, being less diversified looks clever. Over very long periods it may even prove superior – because equities do tend to deliver the best long-term returns – but you have to deal with a lot of ups and downs along the way.

Being diversified means always putting up with owning some things that are out-of-favour, knowing that when the storms come you’ll remember why you owned them, and feel grateful as your portfolio lurches but you hold your stomach.

Well, the storm came the day after the vote, and globally diversified multi-asset portfolios proved their worth.

I’m not going to speculate on which way gilts or what have you will go next. Surely we’ve all learned our lesson there.

Rather, I’d just say it’s a good reminder that nearly everyone should think of government bonds (and/or cash) as portfolio stabilizers rather than sources of return these days, and set their exposures accordingly.

Should you put more into shares?

Is this the time to be greedy when others are fearful when it comes to shares?

Yes, probably. But for the first time in a long time I’m really not confident about doing so.

As those who saw the opinion polls edge towards Remain in the final hours of campaigning and who piled in for a short-term pop soon enough found out, saying there’s a 25% probability of an event happening doesn’t mean it won’t happen.

It means it could happen a quarter of the time.

And on that note I see a very wide fan of potential outcomes from our current predicament.

I could boldly claim this or that will happen, but I don’t feel confident.

Again, you’ll read sure-sounding strangers say why this is a great opportunity to buy Blighty, or on the other hand that it’s a last chance to ditch anything you have in Britain to move your money offshore.

They sound convincing. They don’t know either.

I’m not decrying them for sharing their opinion or acting upon it. Each to their own, and it’s exactly what I do with my own active investing.

As I said on Saturday, I do think that over the long-term, the chances are we’ll muddle through over the next year or five – maybe sooner, possibly longer – so I don’t share some Remainers sense of outright economic panic, especially not from a global investing perspective.

If that’s true, then this could prove a great time to have put money to work, provided you avoid the potential UK-related punchbags (or you pay a sweet price for them).

But to be honest, I’m so gloomy about the almost Kafkaesque situation we find ourselves in, I’m not going to call it.

I certainly wouldn’t stop your regular investments or anything like that. Most of you will be pleasantly pleased by how well your portfolios are holding up. No reason to change anything.

Remember it is precisely because you just keep on keeping on through good times and bad that regularly saving into passive products and then leaving them to compound your wealth works so well.

Two steps forward, three steps back

As a history fan, the recanting of the leading Brexiteers over the weekend about what kind of deal they’ll actually look to achieve reminded me of many clashes in feudal times, or earlier barnies with the Roman Empire.

Very confidently, a smaller state or a client monarch would occasionally march on the major power and demand a better deal.

Else, war!

Not wanting to waste time and resources on a mutually destructive battle, the feudal king or the Romans would often make a small concession to try to keep things amicable.

(In this analogy I’m not just referring to David Cameron’s last-minute jockeying. I’m thinking of our more durable hard-won advantages in the EU, such as our opt-outs and retaining the pound).

Often the deals worked and everyone was happy, or at least equally miffed.

But sometimes they had to go through the rigmarole of a bloody big bust-up – especially if a new rebel leader was trying to prove himself to his people.

Naturally, the big boys usually won.

Chastened, the beaten rebels then returned to the fold, accepted the facts on the ground, and were eventually forced to agree to worse terms than they’d already had before the whole thing started.

When I hear about the UK aping this or that position enjoyed by some other country to trade with the EU, to me history echoes down the ages.

The grass always looks greener. But it rarely is.

Understand the world is a financially riskier place than it was the day before the Referendum result, especially if you live, work, and invest in the UK. Arguably also if you do so in Europe.

Let’s all hope for the best but be prepared for the worst.

Ideally we might try to focus comments below on investing thoughts, choices, and strategies, and to keep Brexit-related politics to Saturday’s thread. I accept I’ve mixed them a bit here though – and perhaps there’s no alternative right now, for the reasons I’ve mentioned. But where possible we’ll probably all benefit from trying.

  1. It’s now 10% down against a basket of global currencies since the Referendum day, according to Bloomberg figures. []
  2. The fact that Eurocrats don’t seem to care about this weight of opinion was the most credible argument of the Leave campaign to my mind, although not by anything like enough to get me voting for them. []

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{ 123 comments… add one }
  • 101 Will July 1, 2016, 9:37 pm

    Regular but so far silent reader of your excellent website here.

    My globally diversified portfolio of index trackers has come through the initial Brexit shock with some gains. But one big laggard is the only managed fund, a UK small caps (in the mix because there wasn’t a UK small cap tracker). I also hold Vanguard global small cap tracker.

    I should rebalance and buy more of the UK small cap, rigorously following the discipline to buy low to benefit when the cycle reverses and UK small caps forge ahead.

    But this time I really do wonder if it would be better to move out of this UK focussed fund and hold only UK exposure that is inherent in all the other global trackers?

    It is hard to see any scenario that doesn’t involve things getting worse for UK companies before they get better. But perhaps because it is hard to see how, is the very reason to keep the UK small caps.

    Any thoughts welcomed!

  • 102 gadgetmind July 1, 2016, 9:52 pm

    @Topman – “straightforward voluntary emigration” so those in the UK are free to live and work wherever we please, but none of those nasty furriners Brexiters distrust and dislike so much can come to our septic [sic] isle?

    Good luck negotiating that one.

    Or maybe we just treat anyone not UK born (or with a skin colour we don’t like?) so badly that they leave?

    There must be something I’m not getting so please explain.

  • 103 The Investor July 1, 2016, 10:17 pm

    Let’s keep it classy please guys.

  • 104 Topman July 1, 2016, 11:13 pm

    @Will (101)

    Welcome. The commenters here are rarely anything other than tolerant, thoughtful and courteous, and TI, TA and the “occasionals” contribute hugely useful articles. I would be floundering without Monevator but I flourish with it.

    Your portfolio sounds well put together, and that suggests a “steady as she goes” approach in the current (no pun) white water. With the amount of change that we’ve had recently, make haste slowly would be my advice.

  • 105 Edmund Blackadder July 2, 2016, 9:22 am

    I’d like to thank Monevator for maintaining a very sanguine position over this past month; I’ve stayed the course, put reserve funds to work on Friday and, thanks to a well-diversified international portfolio, have seen my £ wealth – in my ISA – rise by around 5%. The combination of market volatility and foreign currency denominated funds has been a fine demonstration of why this sitr espouses what it does.

    My own Brexit take is one of optimism. The only mandate delivered last week was to leave the EU. How that actually plays out is a matter for the next PM. I’d suggest the likeliest to be an EEA model with a considerable tally of FTAs bolted on the side – the interest in these from the US, India, Commonwealth and other states has already become clear. It certainly won’t please a large number of Leavers, but I think the symbolism of ‘we’ve left’ will salve many of those wounds and leave only a relatively small number of professional Leaver politicians kicking up a stink.

  • 106 Sara July 2, 2016, 10:29 am

    Rather off topic but I am wishing I had a Delorean and could go back 12 months and put an accumulator bet on –
    1. Trump as Republican candidate for US President
    2. Leicester winning Premier League
    3. UK doing Brexit
    4. Cameron resigning within 15 months of winning an election
    5. BoJo doesn’t run as Tory leader
    5. Wales getting to semi-finals of Euro 2016 !!!!!!!!

    I could laugh in the teeth of Brexit then 😉

    What next in these unlikely happenings, I wonder?
    Trump as US President, Corbyn as Prime Minister, aliens arrive????

    I am not even going to try to guess at who the next leader of the Tories will be……………

  • 107 Jose - Just a Foreigner July 2, 2016, 10:53 am

    I have been reading this blog for years now and this is my first comment, so I think the first thing to say is thank you for all the effort to make all this information available.

    The main reason why I came to this country is because in mine (Spain) the work situation was very unstable, difficult to find a job and difficult to keep it. Nowadays, for different reasons but I have the same feeling. I don’t know what would happen in 2 years time despite being in a good niche of work, I am an engineer, I wonder how younger people with a lower salary and working in service would feel. It’s like when you are falling down and you know that you are going to hit the floor but you don’t know yet how hard is going to be.

    Anyway what makes me sad is that the main reason to vote to leave it has been the “immigration problem”. That makes me think that half the people at my work don’t want me there, and the same when I go into a pub, supermarket, etc. The funny thing though is that for every spanish living in UK There are four English living in Spain. I coul become an English citizen but I see now that this would not change the way people see me, I always would be a foreigner.

    If you check now in google maps there is a pin in UK with a label that it says : If you are not English you are not Welcome. I think that after the outcome of the referendum your immigration problem has already been solved. People will think twice before coming here.

  • 108 The Accumulator July 2, 2016, 1:31 pm

    Jose – there are millions of people in the UK who do not think that way, who believe in a tolerant and open society that welcomes all regardless of background, creed, ethnicity, football team and whatever other category we can invent to divide ourselves.

    That hasn’t changed because of a referendum vote. No doubt some voted leave on the immigration issue. Some because of sovereignty or alienation or just a misplaced desire to drop-kick the status quo in the janglies.

    This is no time for us to give up in despair at what’s happened. It’s time to stand up for the kind of country we want to live in. And I think over time the majority will show we want to live in a country where everyone is given a chance to live a peaceful, prosperous life.

  • 109 The Accumulator July 2, 2016, 1:42 pm

    @ Charlie – re: Irish domiciled investments. Don’t see it being a problem. Given the size of the City and the UK’s balance-of-trade deficit, our prospects rely heavily on our financial services retaining an open door to the rest of the EU. Would be suicidal to shut off services we import from other territories given the amount we export. So… let’s just say some kamikaze pilot does grab the controls for a while, the obvious move would be for fund providers to create spin-off versions of the same products that are available in the UK. Just as those products are available in the US and Europe currently but edited for different regulatory environments.

  • 110 Richard July 2, 2016, 2:38 pm

    I get the perception people might have on the immigration issue, which the media is not helping with. But remainers and even the EU believe in immigration restrictions. There is not an open door policy to the world. So I wouldn’t take the vote personally. People believe immigration is a problem for a complex web of reasons, much the same as every country around the world does (including the EU). There was plenty of opinion against allowing refugees into Europe and it was not just the UK raising concerns. Like many things, it is not a black and white issue (contrary to what many would like to believe)

  • 111 gadgetmind July 2, 2016, 3:47 pm

    @Jose – your words sum up what I know many who work for me are feeling, and many others across the UK. Finding work in Poland, Greece or Spain that did justice to their intelligence and hard-won skills was difficult, and we were glad to welcome them to the UK. We’ve worked together as an international team, and as friends, and I hope we can continue to do so, but I understand your unease and I wish I could say something that helped.

    I don’t know what’s going to happen over the next two years, and it’s this doubt that’s going to damage the UK in ways that we really can’t imagine.

    As @TA says, “It’s time to stand up for the kind of country we want to live in”, but we did that at the referendum and failed, and when we now complain about the lurch towards isolationism and xenophobia people post pictures of crying babies and tell us “Grow up, you lost.”


    As for investing, one side of what I do that I don’t discuss much is what they call “angel investing”, which is a combination of foundation funding, advice, and “sweat equity”. I contacted two nascent companies that I’m helping get off the ground to assure them I was still in but they said in effect “don’t bother, the other parties have pulled out given Brexit.”

    I still might be able to make it work once I can arrange some conference calls next week, but there is a lot of fear out there on many levels.

  • 112 Richard July 2, 2016, 8:26 pm

    @Gadegtmind – this is the issue I have. People equate immigration control with xenophobia and isolationism (i understand why – the media and the internet trolls don’t help). I do not believe it as simple as that. Even the EU has an immigration policy towards the rest of the world. Does that make it xenophobic and isolationist? Maybe it does, but it has one for good reason.

    Much like trade agreements, when it comes to immigration each nation (or group of nations) will act in its best interest. Otherwise I assume we expect the EU to offer us an amazing trade agreement because otherwise they would be xenophobic and isolationist towards us. UK voters clearly have an issue with immigration and the status quo is not helping to solve that issue. They have voted for change as a result. The EU and The government should have worked to find a solution to this issue but did nothing. I don’t see it as xenophobic or isolationist. I see it as a very large group who feel their interests have been largely ignored by the elite and democracy ultimialty is driven by interests.

  • 113 The Accumulator July 3, 2016, 12:05 pm

    @ Charlie – comment from Vanguard:

    Brexit will probably mean higher costs for European investors. The ability to ‘passport’ financial services has allowed UK-based asset managers such as Vanguard to distribute funds into the EU cheaply and efficiently. In the absence of these passporting arrangements, asset managers might need to set up additional offices in continental Europe, and it’s likely that the cost of doing this would be passed on to the end investor.

    The alternative argument is that the cost of investing in the UK could fall due to a removal of regulatory costs imposed by the EU. Overall, the net effect is still probably to increase costs, but this is another area where the impact is not clear-cut.

    Taking all these factors together, the pros and cons of Brexit for individual investors will be affected by a wide range of factors. As ever, the best approach is to be clear on your goals, to take a long-term view and ensure that your portfolio is well diversified.


  • 114 gadgetmind July 3, 2016, 3:24 pm

    > Even the EU has an immigration policy towards the rest of the world. Does that make it xenophobic and isolationist? Maybe it does, but it has one for good reason.

    It has one for a reason, but I’m not sure it’s a good one.

    Free movement of people is a good thing, and used to have close to zero restrictions imposed upon it. Passports and borders are a modern invention, and one that has brought a great deal of misery. It’s good that we’re slowly moving back towards free movement, and becoming more accepting of people whose skin in a different colour, whose first language isn’t the same as ours, and whose customs are different. That we’d chose to move away from this rather than towards, and that we’d breed an environment where abusing anyone “not from round here” on the streets becomes normal and accepted, is deeply disturbing.

    At least it is to me, but I’m in the Remain minority, so what do I know?

    BTW Read the Migration Special in the 2016-04-09 edition of New Scientist for more information.


  • 115 Catherine July 7, 2016, 9:32 am

    The Investor,

    I’m not quite sure how old you are, but from the way that you write, I assume you are quite young and part of “Generation Rent”. Therefore, my suggestion to you is that, rather than fretting about whether your shares are going to go this way or that your bonds are going go that way, religiously handing over your hard earned pay to your greedy landlord, bite the bullet, sell some of those investments and try to find the money for a deposit on a flat. Once you have done so, pay off that mortgage as soon as you can.

    Someone once said to me that, once you home is paid off, it doesn’t matter what sort of financial armageddon happens, you can live off the contents of your greenhouse. He was half joking, but you have to admit he has a point!

  • 116 The Investor July 7, 2016, 10:08 am

    @Catherine — VERY long story. 😉

  • 117 Steve July 7, 2016, 12:51 pm

    The Investor,

    How about the abridged version then?

    It has always fascinated me how you so concerned with creating wealth for yourself, yet you prefer to hand over rent to someone else than own you own your own home. It smacks of a contradiction to me, unless I’m missing something.

  • 118 The Investor July 7, 2016, 1:27 pm

    @Steve — UK houses are great investments so long as you don’t overpay. I misjudged what was “too much” in London 2004 — indeed I have said many times it was a hugely costly mistake to withdraw from a purchase then, that’s cost me multiple six-figures.

    Furthermore when London prices were reasonable again for about 5 minutes after the credit crisis, I had no liquidity, and didn’t want to sell shares at the bottom.

    I think London residential property remains very overvalued as best I can judge, according to my metrics — note this doesn’t mean that won’t be true for years more. Who knows, perhaps my whole life? If that happens it could still be “over-valued” and yet have been a rewarding investment, in that the price went up.

    I understand many will cry foul at this sort of thinking, but I follow Buffett’s line of “price is what you pay, value is what you get”. I’d also point out that I’ve been very candid about my misjudgements and the cost to me so I don’t think I’m fooling myself (in contrast, home-owning friends of mine in London have only become realistic about their own good fortune versus any savvy investment skill in the past couple of years, when most have come to realize they have been lottery money lucky. Good for them, incidentally, especially those who bought entirely under their own steam without family handouts).

    The “handing over rent” argument doesn’t move me much. I’m getting something for my money — somewhere to live.

    These are a few more recent-ish articles of mine on the subject:



    And this one, which should demonstrate I’m far from “anti-housing” in principle (indeed I have old friends who try to buy me a drink whenever I see them because I encouraged them to think about buying their own home in the late 1990s / early 2000s).


    I hope this gives some more insights into my thinking. Any other housing related conversation is better on those threads than this one cheers. 🙂

  • 119 Al July 9, 2016, 11:38 am

    The Investor,

    You should really stop falling into the trap of making speculative investments. The best time to invest money is when you have it, not when you think it is the best time to invest, because then it is already TOO LATE.

    Houses are only ever expensive on the day you buy them. If you don’t believe me, ask your parents.

    Good luck in getting on the housing ladder someday.

  • 120 The Investor July 9, 2016, 12:15 pm

    @Al — Well, live by the sword and die by the sword. 🙂 Also, I am always largely invested (as I said in the comment above), just not necessarily in property. What’s hurt me most with houses – and helped make long-time homebuyers so wealthy – is the ability to gear up with debt. When prices rise for decades, like they have, even Warren Buffett’s returns can’t match them.

    Of course that doesn’t negate your main point (although it’s often been hard for me to get a decent mortgage due to my varying employment status and disinclination to commit fraud back in the days of “liar loans”) but it also increases the risks if, like me, you think property is fundamentally over-valued. 🙂

  • 121 Newbie July 9, 2016, 7:08 pm


    I have an fixed cash isa coming to an end and due to very poor Isa rates at present feel its time to perhaps invest. I would like a low risk and have looked at Fidelity Multi Asset Allocator Defensive and would value your thoughts for a newbie.
    Also could find the TER for this fund

    thanks for any advice

  • 122 Mike Rodent October 21, 2016, 10:03 am

    Betting against the pollsters?

    Excellent website… just wondering whether your “passive investing” strategy shouldn’t include ideas about preparing for “something like the Brexit vote”? Of course “things like the Brexit vote” don’t occur often, but for example I did a lot of things before the vote, like switching to US and Euro funds and converting funds to cash. I was far from passive. I reinvested everything during the fortnight after the event…

    One thing I noticed on the night of the 23rd, about 8 pm, was that you could bookie’s odds for Brexit of 11-2! I considered betting £2k, although a bet of £20k would have been more rational if the assumption was that the £ would slump post-Brexit (as it did): because I knew that the value of my house would slump (against a basket of currencies) by a lot more than £20k.

    As it was I bet nothing, for a very laughable reason: I did not want to tempt fate. I smiled at my motivation on the evening of the 23rd, and laughed about it on the morning of the 24th.

    But don’t you think there may be rational reasons to bet against widely assumed outcomes of things like general elections as part of your defensive, passive investment strategy?

  • 123 gadgetmind November 29, 2016, 7:29 pm

    A key part of passive is “strategic ignorance”. Yes, you can bet, and hedge, and trade, and duck and weave, but you’ll often duck when you should have weaved.

    I’m glad I wasn’t uninvested and sitting in sterling when it lost 20% in value. Maybe it could have gone the other way, but sitting in “real” assets took away the guesswork.

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