Navigating Brexit with your investments – Part 2

Markets can move quickly on news, so how is it possible to address ‘Brexit risk’ in a portfolio?

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  1. Rob Morgan

This article is part of a 3 part series. In case you missed it, read Part 1 here

 

What if there’s an election?

The chance of a general election being called looks to be on the rise. Could a fractious campaign make things even worse? It is clear that the current parliament is incapable of making progress. So, in theory, an election will allow a new government to be formed that will be in a position to forge a way forward and provide clarity for business and investors. However, there are issues associated with a Jeremy Corbyn government that are likely to see some sectors hit during the campaign.

Labour plans to reverse privatisation and buy back companies, potentially at lower values than the current share prices. Shares in these businesses may underperform should Labour’s campaign go well. Areas under threat from nationalisation include rail, outsourcing and defence.

Perhaps the most controversial Labour policy for investors is its Inclusive Ownership Funds proposal, which requires any company with more than 250 employees to transfer 1% of its shares each year into a trust fund for its workforce, up to a total of 10% of the total equity. This will happen through open market purchases of shares in the market for the benefit of the employee fund, or by issuing shares as a scrip dividend. The latter would result in a 10% dilution in dividend payments to shareholders over a decade. The most controversial part of the policy is that each worker’s payment from the fund will be capped at £500 a year, with dividends over that amount being sent to HM government so Jeremy Corbyn and John McDonnell can decide how they are redistributed.

Law firm Clifford Chance has identified a number of legal impediments to the proposal. However, even if the chances of it being implemented are slim, and an overall Labour majority appears pretty unlikely, it still increases the political risk for UK equities. However, if an election produces a route out of the Brexit impasse it may well be regarded by the market as positive.

 

How to react

Brexit is a complex situation with an unknown timescale, but the standard rules of portfolio construction apply. Focus on what you can control rather than what you can’t – second-guessing the ultimate outcome could be a fool’s errand anyway. Broader, global factors may play a greater role in shaping portfolio performance in the longer term and company-specific factors might well dictate the direction of any individual shares more than the Brexit outcome does. In any case, the market reaction may be contrary to what people would expect it to be.

It could be a good time to review your investments, though, to ensure they still meet your objectives and needs. Diversifying across asset classes will help mean your portfolio isn’t too dependent on one outcome or another.

 

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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