With the UK’s referendum vote on whether or not to remain in the EU almost upon us, this note looks at the impact that BREXIT could potentially have on portfolios. The longer term benefits of remaining or exiting are still up for (a passionate…) debate, however there will be a short term impact and therefore be a tantalizing opportunity to trade with/against the resulting swings in the market
The key is to stay calm in the face of market uncertainty. ‘This too shall pass’ is the investment mantra that is often used in times of distress. At times like this, it is easy to become overly concerned about near-term events, such as the outcome of this referendum. Your life as an investor will inevitably be punctuated by an ongoing series of near-term events, making life continually uncomfortable, unless you view them in context.
Most expats have a range of currencies that they hold their assets in and generally the currency that your portfolio is in will dictate whether there will be a loss/gain. In the event that Sterling takes a beating, it is worth remembering that the overseas equities in your portfolio come with the currency exposure linked to those assets. For example, owning US equities comes with US dollar exposure. If the Pound falls e.g. against the US dollar, these US assets are now worth more in Sterling terms, thus mitigating the fall in Sterling to some extent. In short, a fall in Sterling has a positive effect on non-UK assets.
What is if there is an EXIT?
If there’s an exit vote, then volatility explodes. Likely to be a fall of 5%+ in FTSE markets and subsequently European exchanges will follow as well. Sterling will drop in value as investors look for other currencies as the market tries to come to terms with what this means for the UK economy and the impact on the wider global economy. To take advantage of this in the short term then a short ETF can be placed on the market or buying a fear index such as the VIX. The FTSE in GBP can always be bought later on in the week after the initial falls have taken place.
What if it is remain?
Effectively the opposite of the above FTSE, GBP and Europe are likely to increase in value and the VIX is probably going to fall as the fear drains from the market and certainty prevails. Buying a GBP FTSE ETF will see a jump in value in both the assets and currency.
Your portfolio is well-diversified giving you exposure to other developed equity markets and emerging markets, which will help to mitigate any UK-specific market fall. Equity markets as a whole might be volatile, but that is the nature of equity investing, and being diversified will help. Changing the mix between bonds and equities would be ill-advised.