Strategy & economics

Brexit: deal or no-deal - and what either outcome might mean for your portfolio

As Theresa May battles to secure support for her Brexit deal, we assess the impact on portfolios of a range of possible Brexit outcomes

29/11/2018

Christopher Lewis

Christopher Lewis

Investment Manager

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.

Author

Christopher Lewis

Christopher Lewis

Investment Manager

Chris joined in 2010 and is currently an Investment Manager. He has an undergraduate degree in History from Cambridge University as well as a Graduate Diploma in Business and Management from the Judge Business School and holds the CISI Masters in Wealth Management.

This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.

All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

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