Given the travel restrictions in place, Canada and Australia have been getting a lot of press of late. The reason of course is the Brexit ‘Deal or No Deal’ with Deal (Canada) and No Deal (Australia) set to go to the last minute of the 11th hour.
As investment advisers, we have to set aside politics and personal preferences and view the negotiations through the prism of the impact on markets and, in consequence, your portfolios.
The most important observation is that the UK equity element of virtually all portfolios is relatively small. And has been getting smaller. Over the past two years we have been reallocating UK exposure to overseas markets which has benefitted performance.
Since the vote to leave over four years ago now, capital flows have tended to shun the UK relative to US and Far Eastern markets. This has meant that even the truly Global companies that make up the top end of the FTSE100 have seen less support than they might have had if their main listing been on foreign exchanges.
Capital flows do matter particularly in the short term, but valuation matters more in the long term. We are in regular contact with UK Fund managers and they of course speak continuously with the companies in which they invest. We trust them to make the right judgement calls over how the companies will cope with either outcome.
As we saw with the first positive news on the vaccine, a change in sentiment can have an immediate and sharp impact on share prices. The strong rise seen in UK equities in November took place despite no real progress in Brexit negotiations and despite the clock ticking down on the chances of a deal.
As stated previously, when we know the result, the biggest movement may initially be reflected in sterling. Simplistically, a no deal exit is likely to cause sterling to fall in value. The big global players in the FTSE100 would see a gain in the translation of their overseas earnings back into sterling which may, counter-intuitively see strength in the Index.
Equity investment is long term and next year markets are likely to be focussing upon economic recovery and hopefully further progress on vaccines, rather than the current state of Brexit.
No-one looks forward to potential disruption in the supply chain and the outcome of a No Deal is likely to adversely effect our lives in the short term, the extent of which cannot easily be quantified. The impact for some and their businesses, after such a difficult year is not to be taken lightly.
However, whilst we are far from sanguine about the outcome, we take some comfort from knowing portfolios will come through the ‘crisis’ intact with many of the investments untouched by Brexit. We have no control over the outcome but feel portfolios are ready for the impact either way.
We take this opportunity to wish you all a Happy and above all, safe, Christmas and New Year.