[Trigger warning: Off the cuff Brexit thoughts ahead. Reading is optional! My blog, my thoughts, and I’ve started so I’ll finish. Just click away and you needn’t be troubled by it! Nor will you feel forced to be rude about me in the comments.]
A few days after the Referendum in 2016, I wrote a short satire chronicling the happy state of Barry Blimp, a middle England Leave supporter:
And Brexit is going so well! Better than even Barry might have expected.
True, the markets initially dipped 2-3% percent when the result was announced, as lily-livered Remainers sold their holdings and made enquiries about moving to Australia.
But equities soon bounced back as brave Brits like Barry stepped in to staunch the bleeding.
Article 50 was triggered immediately, and the terrified Europeans quickly caved in to all the bold Brexiteers’ demands.
Now international capital is flocking to the UK, as it sees how the nation has freed itself from the yoke of EU membership that had held it down and kept it only the fifth largest economy in the world.
At this rate we’ll be challenging China for the number two spot by Christmas!
Two and a half years on, and as fantasy has given way to fact an apology is required.
I apologize to anyone named Barry.
Back in the (sur)real world, Brexiteer MPs – including two former Brexit secretaries – are looking to thwart Theresa May’s best attempt at solving British politics’ version of Gödel’s incompleteness theorem.
They aim to derail May’s deal by employing the same meaningful Parliamentary vote won by those they once branded “The Enemies of the People”.
Just another day in Brexiteer-land.
After that Referendum
As predicted, Brexit has been an all-consuming waste of time for nearly three years1.
And it’s done this blog no more favours than the country.
I lost many readers in the Referendum’s divisive aftermath. I became less enthusiastic about writing here, too.
At least Remainers and Leavers are now united in agreeing Brexit has been a shambles.
My more constructive critics suggested I focus on the investing implications.
I see their point, but the perverse contradictions of Brexit makes this easier said than done.
Macro-economic forecasting is always fiendishly hard, and with Brexit the range of outcomes is very wide and the appropriate actions you might take at odds with each other. Assigning probabilities to the various exit scenarios feels like betting on raindrops sliding down a window pane.
The only certain advice is to be diversified. But that is always the best advice.
Even leaving aside the fickle markets, let’s consider the British economy.
The story so far
Everything that has happened so far is before any Brexit, remember. Today we still enjoy exactly the trading arrangements as we did before the Referendum.
Still, I thought uncertainty alone could take us into recession after the Referendum. I wrote a post saying so, and suggested ways to think more defensively.
But as things turned out, there was no recession. Some criticism from Leavers on those warnings is understandable.
So why did the economy keep growing, against expectations?
Perhaps I and others were wrong to be so gloomy, but there were other factors – the unexpected delay in triggering Article 50, the interest rate cut (opposed by many Brexiteers), and most of all a sudden recovery in the Eurozone, ironically enough. It’s hard to have a recession when your largest trading partner is expanding, retooling, and restocking, even as interest rates are being cut towards zero.
The weak pound probably hasn’t hurt either, although it’s squeezed importers – not least struggling retailers and restaurants.
Also, while we didn’t go into recession, we did go slump from being the fastest-grower among the leading G7 economies to the slowest:
If you’re a hardcore Brexiteer who wants maximum sovereignty then this economic hit – and even the chaos of a No Deal exit – may well be worth it.
I can respect that point of view, though I think maximum technical sovereignty is a hollow victory in our incredibly integrated world (we’re already seeing that in the compromises May struck with Brussels).2
But for the rest of us, it’s a bit sickening to imagine where we might be now had Remain won.
With Europe recovering and the rest of the global economy motoring, we’d likely have seen a mini-boom. Higher real wages, and politicians focused on all the important issues they’ve been forsaking for the phony Brexit war.
Maybe we’d even have made more headway with the public finances.
Pounding the point home
As for our personal finances, so far Brexit has appeared to be a boon for well-diversified British investors based in Britain.
This is due entirely to the sharp fall in the pound – something Brexiteer MPs reliably fail to mention when citing a rise in the FTSE 100 as proof the market is fine with Brexit.
As is now well understood, global equity trackers mostly hold overseas assets. Three-quarters of the revenues of the UK’s largest companies come from abroad, too.
So the sharp fall in the pound on worries about what Brexit means for Britain has actually boosted both the London market and many a diversified Monevator reader’s net worth.
Of course, that’s measuring your net worth in sterling terms, as most of us do.
On the global stage we’re poorer than before the Referendum, due to that plunge in the pound. This loss of purchasing power is showing up at the margins in higher import prices including food and fuel, and in Britain becoming a less lucrative market for EU workers.
You’ll also have felt it if you’ve holidayed abroad.
Investing in the face of Brexit
Having made it thus far intact through the Brexit saga, what should investors do now?
Well, in terms of your personal finances, I think a safety first review is in order. Even Brexiteers admit crashing out without a deal in March will be disruptive. At the other end of the spectrum the forecasts are dire.
Either way, given Hard Brexit has become a very possible – if still less likely – outcome, make sure you’re sandbagged against any potential storms.
I think my original post on actions to take ahead of a possible recession is worth reading.
What about investing specifically?
The good news for well-diversified passive investors is they needn’t do much, if anything.
Indeed the entire Brexit saga has been another notch on the bedpost for strategies like our own Slow & Steady passive portfolio.
One of many benefits to getting your equity exposure via a global tracker (or a basket of large geographic equivalents) is you diversify away country-specific risk. This inoculates you against the dreaded ‘Japan syndrome’ – the possibility that a particular country’s stock market goes down not for a brief bear market but for an investing lifetime.
True, with the bulk of its earnings generated overseas, the UK’s FTSE All-Share is less at risk of this than most indices. But it is still good practice for hands-off passive investors to follow the global money, as we’ve explained before, and it has served you well in the face of Brexit.
Most passive portfolios will also own a chunk of UK government bonds (gilts), which have held up well.
Of course gilts have not benefited from the weaker currency, but that’s fine. A good portfolio is about balance. Bonds are not really there for return, and you’ll be happy to have some exposure to the pound if Brexit is resolved amicably and sterling rallies.
Beyond those two lynchpin holdings come corporate bonds, commercial property, foreign bonds (typically hedged) and more exotic fair such as emerging market and small cap funds, gold and commodity ETFs, as well as factor funds.
These should all be relatively small allocations, and so in the short-term they shouldn’t be determining how your portfolio fluctuates as Brexit progresses. Their aim is rather to gain a small edge over the long-term.
When I started this post I thought this would be the biggest section. Now I’ve got here though I find myself thinking there’s little to constructive say to my fellow naughty active investors.
I can only tell you what I’ve been doing.
Note: This post should be taken as a talking point, not as advice as to what you should do yourself. I am far less sure as to how things will unfold than I was even in the financial crisis! See below for more.
Firstly, I am shifting my portfolio allocations around a lot – daily – as things change. This has a big cost in terms of friction and hassle, but, well, that’s what I’ve signed up for. (See this for more. And again I don’t advise it!)
Right now I have the smallest allocation to UK -listed companies – my traditional stock picking ground – I’ve had in 15 years, though it’s still above benchmark weighting. I’ve been especially wary of most UK-focused firms.
Percentage-wise I’m the least exposed to equities I’ve ever been as an investor, although mostly for reasons other than Brexit.
I hold huge (for me) wodges of cash as well as a handpicked and changeable collection of bond ETFs. I’m 6% in gold ETFs (hedged and unhedged).
Diversify, diversify, diversify!
For two years now I’ve also invested with one eye on the exchange rate, which has been an extra headache.
Several times I’ve increased my UK focused holdings when the outlook has looked brighter.
The pound looks undervalued, and I fear a sudden reversal if Brexit pessimism proves unfounded.
But mostly the traffic of UK holdings from my portfolio has been outbound.
This snapshot of the biggest fallers from the FTSE 100 mid-afternoon yesterday gives a good idea why:
To make matters even more complicated, many UK-focused companies are probably falling due to the growing chance of an interventionist Jeremy Corbyn government.
In fact active investors trying to position their portfolios in light of the various Brexit outcomes have to think about at least five credible scenarios (my guesses on the likely impact in italics):
Hard Brexit – Clearly now possible given the universal dislike in Parliament of Theresa May’s deal and the time left before we’re meant to leave. Bad for UK-focused shares, unclear for gilts, very bad for the pound, good for overseas earners/holdings, could see interest rates may go higher or lower.
May’s Deal (previously Soft Brexit) – The deal on the table pleases nobody (leaving aside the fact that it’s not even really a deal, just a divorce settlement and an outline for how to proceed). In the short-term at least it’s a far worse arrangement than we have now in almost every respect. But MPs might end up voting it through anyway because it’s better than Hard Brexit. Okay for UK-focused shares, unclear for gilts, good for the pound, bad for overseas earners/holdings, interest rates probably go higher.
A New Amazing Deal With Unicorns – Perhaps the Government will somehow get more time to come up with something better. I don’t believe anything much better is possible, given the contradictions of Brexit and the EU’s position, but who knows. Great for UK-focused shares, unclear for gilts, good for the pound, bad for overseas earners/holdings, interest rates probably go higher.
Second Referendum / No Brexit – Does anyone believe Leave would win a Referendum if it was held tomorrow? Brexit was blatantly mis-sold, which you’d think would be enough to reverse Leave’s slender majority. I worry about the democratic impact of not Brexiting, given how it’s been spun up as The Will of the People, but that’s for another day. Still unlikely, anyway. Great for UK-focused shares, unclear for gilts, great for the pound, bad for overseas earners/holdings, interest rates probably go higher.
General Election – Possible now, and I think Jeremy Corbyn would have a fair chance of winning. It’s unclear what the Labour party’s approach to Brexit is. Yes I know what they say, but are, for instance, the fantastical ‘six tests’ really meaningful? Bad for UK-focused shares, bad for gilts, bad for the pound, good for overseas earners/holdings (short-term), interest rates may go higher or lower.
As you can see, describing Brexit possibilities as a binary outcome doesn’t really cover it.
Moreover as these possibilities come to seem more or less likely, their consequences are brought forward or discounted on a moment to moment basis.
Traders might thrive in such an environment (though I’ve seen little evidence of that) but it sure makes the fundamental company-level analysis I mostly employ extremely difficult.
Passive is a great alternative. If I could click my fingers and do it all again I think I’d put everything into a Vanguard LifeStrategy 60/40 fund the day before the Referendum and not look at my portfolio until this is over!
How are you invested?
Finally, remember our recent discussion of mental accounting in all this. In particular factor your home into your thinking about your exposure to recession and market risks, assuming you own it.
If you’re concerned that your global trackers mean you’ll be hit should the pound rise, your house may comprise a huge proportion of your wealth that effectively hedges against that possibility.
On the other hand if you’re a stock picker who has mainly been buying cheap UK-focused shares, the opposite could apply. Your house could fall 20% or more in some Hard Brexit scenarios. Why take the risk of all your shares going the same way?
How have you been investing through Brexit? I am sure – indeed I hope – we’ll hear passive investors say “drama, what drama?” That’s what this site exists for!
But I’d also be curious to hear how fellow travellers along the dark side of investing are approaching the conundrum.