Intense uncertainty around Brexit – where a wide spectrum of outcomes remains possible – is dominating headlines and creating anxiety in financial markets and beyond.  

We do not speculate on individual political events but recognise political uncertainty as another source of volatility. We use quantifiable measures such as valuations and economic data to position portfolios to navigate a potential range of outcomes.

Despite cabinet approval of a draft withdrawal agreement, the road ahead for the Brexit negotiations remains unclear.

In building portfolios we have considered both what the market would initially perceive as negative - namely a no deal or “hard Brexit” - and what the market might perceive more positively, namely a deal that delivers a “soft Brexit”.

Hard Brexit

• While we have maintained the same level of total equity exposure within portfolios, we have shifted our sterling-based portfolios towards a more global orientation. There were a number of reasons for this move, including to achieve greater sector diversification. Brexit was not one of the reasons, but a consequence of the shift has been to reduce our exposure to sterling and so introduce a greater currency hedge against a hard Brexit. 

• The increased allocation to global shares has contributed to a reduction in the total sterling exposure.  Sterling is likely to remain volatile, and could see a sharp sell off in the event of a hard Brexit. Reduced exposure to the currency in portfolios, as well as the increased exposure to non-sterling revenues of our global shareholdings, should benefit relative performance in this scenario. 

• We have maintained our exposure to index-linked gilts within sterling portfolios, which should act as a hedge against imported inflation from significant sterling depreciation. During the period of uncertainty over the currency witnessed in the past week, our holdings in shorter duration index linked gilts have generated both a positive return as well as outperforming conventional gilts.

Soft Brexit

• While we are watching risks to global growth we have maintained our headline equity allocation and continue to monitor whether market levels present an opportunity to add exposure at attractive valuations. 

• While we have reduced the UK equity weighting over the past couple of years, investment selection within this asset class has focused on identifying skilled portfolio managers with an active approach to stock picking across the market. This has resulted in increased exposure to the “domestic” UK stocks where we feel active managers can take advantage of market inefficiencies as well as benefiting from potential sterling appreciation. 

• What about a possible rally in sterling? To that end we have investigated hedging overseas exposure through the use of currency options to protect against a significant sterling appreciation.

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