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Brexit: Negotiating Financial Markets

Every day seems to bring another story on how Brexit negotiations are progressing or not as the case may be, depending on the political view being taken.  

Of late, financial markets are beginning to show some nerves around the continuing uncertainty and it is almost inevitable that in the months and probably years ahead the recent increased market volatility will continue and, in all probability, increase further until the implications of the eventual final Brexit terms are established and fully digested.
 
It is difficult to quantify in isolation the recent impact of Brexit negotiations and expectations on markets, as fears about US trade wars with China and Europe after the imposition of tariffs along with the re-imposition of sanctions on Iran, have dampened global economic growth forecasts. However, many economists believe that overall the global economy is relatively sound and Brexit obviously has far more significance to the UK and European markets.
 
Historically many UK investors’ portfolios have been weighted to the UK market and whilst this is understandable it does not appear to provide the level of diversification needed to keep the level of portfolio risk and volatility in line with their expectations when such a significant economic change is taking place.
 
The relative strength (or weakness) of Sterling is already being tested on a regular basis as negotiations swing to and fro, and this also has a significant impact on investors’ portfolio valuations given that approximately 73% of revenue generated by FTSE 100 companies comes from outside the UK.
 
Whilst asset class diversification can assist in reducing correlation, a poor Brexit outcome, whatever that may turn out to be in practice, is likely to place considerable strain on a UK or perhaps even European orientated investment portfolio, particularly in the short term.
 
Everyone has a view on how financial markets may react under different scenarios and given the wide-ranging differences of opinion not everyone can be right. However we have already entered unchartered territory and the fact is that no-one is in a position to forecast with any certainty the current optimum investment strategy to deal with the number of possible outcomes.
 
Adopting a major short-term tactical or strategic play on their investment portfolio is unlikely to be prudent for most ordinary investors as the risks involved in doing so may well outweigh any potential benefits. Instead the tried and tested approach of a well diversified investment strategy across different asset classes and global markets over the medium to longer term is likely to continue to serve them well.
 
The political and economic rhetoric will continue and likely increase as key aspects of Brexit negotiations are clarified and this will be reflected in the financial markets’ short-term response. However it is uncertainty which markets most dislike and as the picture gradually becomes clearer markets will find their level and this element of political and economic risk will become less of a threat to investors when taking a longer-term view.
 
Therefore for the moment investors would be well advised to ensure that they fully understand their existing portfolio’s objectives, the level of diversification provided and that it can be adapted to deal with any unexpected outcomes which may impact on their financial plans.

Every day seems to bring another story on how Brexit negotiations are progressing or not as the case may be. Our Managing Director has written an insightful piece on the impact Brexit may have on our financial markets.

 

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