Brexitproof

Which investment companies will outperform in 2019? The answer may depend on your view of how Brexit will finally play out – and how the equity, bond and currency markets respond.

Of these markets it is the latter that may prove most significant. The consensus view amongst economists is that any withdrawal deal between the UK and the European Union, even if Brexit has to be delayed, would boost the value of the pound. Equally, if the UK crashes out of the EU with no withdrawal agreement, it seems likely that sterling will tumble – some analysts predict it could fall to parity with the dollar.

The difficulty here is that these two outturns imply investors and advisers should be gravitating to two very different sets of funds.

If you expect a deal – and therefore a stronger pound – it makes sense to focus on UK funds with holdings of more domestically-oriented companies that have less exposure to exchange rates; this is likely to mean smaller and mid-cap equities. If you anticipate a hard Brexit – and a fall in the value of sterling – international funds then look more attractive, given that overseas returns will be worth more once translated into pounds; large UK companies with extensive overseas earnings should benefit similarly.

It’s never that simple, of course, because markets are moved by multiple drivers. For example, you might deem the case for international equities undermined by fears about the weakening global economy. You might also argue that UK equities look undervalued by comparison to other markets.

Even making the case for diversification through a spread of asset classes – standard advice for those simply looking for safety during the Brexit process – isn’t easy. Many infrastructure funds, for instance, have substantial overseas assets and are therefore exposed to currency market movements; these funds may be uncorrelated with equities in other regards, but not on this characteristic.

Nevertheless, while the Brexit morass continues – the Christmas break, when the issue briefly dropped out of the headlines, already seems an age ago – the debate for investors and their advisers does now seem to be crystallising into harder positions. If you’re expecting no deal, you’re probably in the market for large-cap UK equities and more international exposure; if you anticipate a compromise being found, small and mid-cap UK stocks look more attractive.

The bigger question might be whether it is even worth bothering with this type of speculation. Certainly, making predictions in the current environment is a fraught game – and in any case, worrying about how markets will move in the weeks and months ahead isn’t a sensible basis for long-term financial planning. Better to make a plan for five or 10 years’ out, based on objectives and attitude to risk over that period, and then to stick to it.

That’s true up to a point. It does make more sense to construct investment portfolios with this strategic mindset. Still, many investors also want to make shorter term tactical decisions about asset allocation, even if only for a proportion of their portfolios. This is where the debate about the more immediate direction of markets is more significant.

The bottom line is there are no certainties here. But investors and advisers can at least make the best use of the resources available to them. In the current environment, it’s a brave investor who puts money into a collective vehicle without understanding where that fund invests. In that regard, the extensive information the AIC publishes on its website, including detailed data on the asset allocation of individual investment companies, is an invaluable resource.