Beware of making knee-jerk reactions

It is hard not to react to tumbling sterling and falling global stockmarkets while trying to predict what the decision to leave the European Union means for savings and investments over the longer term.

Adrian Lowcock, head of investing at Axa Wealth, observes: “Times of uncertainty will knock investor confidence as they see falling share prices and panicked experts predicting doom and gloom. This leads to making quick and often irrational decisions, such as selling after the market has fallen. Investors need to remember that in the short run, markets overemphasise the importance of current events, while they barely register over the long term as markets revert to fundamentals.

“Investors need to look through all the noise and remain focused on their personal goals. Any sell-off will produce opportunities for prudent investors looking at the big picture and focused on the longer term.”

Bruce Moss, strategy director of eValue, comments: “Based on the impact Brexit has had on the financial markets, in the immediate aftermath advisers should be making changes to their strategic asset allocation benchmarks. However, the reallocation of client investments to new benchmarks should be made progressively over time to minimise costs and risk.”

But how can investors exploit any opportunities thrown up by the market turmoil? The most obvious opportunities are perhaps to be found in equity markets.

The investment team at Whitechurch Securities, comprising Gavin Haynes and Ben Willis, points out: “Brexit is likely to have more of an effect on domestically focused businesses that are more prevalent among medium and smaller share indices.”

Philip Saunders, portfolio manager of the Investec Diversified Growth fund, explains: “It will be important to discriminate between stocks that are likely to be affected by largely domestic cyclical factors, which need not be long lasting, and companies such as banks, which may be affected more structurally. The market is unlikely to discriminate at first, and for those able to adopt a company-by-company approach this would represent a longer-term advantage. Many UK-listed companies would actually benefit from sterling weakness, either through improved competitiveness or from the translation of overseas earnings.”

Investors may choose to invest in multi-asset, multi-asset income and absolute return funds in a bid to diversify their portfolios in the coming months, while ensuring they receive some kind of income.

Peter Toogood, investment director at The Adviser Centre, favours absolute return funds “if you must invest”.

He explains: “We have witnessed an unprecedented period of outperformance of financial assets over the real economy and this is going to reverse. The winning strategy in the proper bull market – which is coming – will be economically sensitive stocks over bond proxies. Bonds are ‘toast’ in this brave new world. Technology will also win because, while being high growth, the sector is also super cyclical.”

Many investors will rely on active managers to do the stockpicking and asset allocation decision-making for them.

Edward Bonham-Carter, vice chairman of Jupiter Fund Management, says: “For long-term investors, making decisions in a prolonged period of uncertainty and volatility can be challenging. Trying to time a re-entry into such choppy waters can be very difficult and those investors standing nervously on the sidelines may choose to minimise the risk of major misjudgements by investing incrementally through regular savings schemes. These plans buy fewer units or shares in mutual funds when prices are high and more when they are low, helping to smooth out the peaks and troughs of equity markets.

“Any market falls in the early years of such schemes often prove beneficial, as those making initial investments can pick up units or shares at more attractive rates than during a bull market,” he adds.

Ellie Duncan is deputy features editor at Investment Adviser

ASSET ALLOCATION CASE STUDIES

Edward Smith, asset allocation strategist, Rathbones

■ Equities

The FTSE 100 index is still notably above its February trough. But the FTSE 250 is another matter. We had identified a very close correlation between the equity risk premium for mid-cap stocks and our measure of UK economic uncertainty. This has driven the rerating.

■ Fixed Income

Gilt yields have hit new lows, reflecting interest rate expectations. Breakevens have barely budged. Five-year overnight interest swaps are down 25 basis points – a decent move but it suggests much was already priced-in. Senior investment-grade spreads are wider but relatively subdued.

■ Property

Valuations are high and returns are expected to be driven by rental income, which is likely to be highly sensitive to the potential uncertainty. Long lease agreements are likely to be replaced by short leases, giving less visibility to future earnings and hence requiring higher risk premiums.

Steven Andrew, manager, M&G Episode Income fund

■ Equities

The equity risk premium is the most obvious opportunity on offer and we remain of the view that equity pricing in several regions is overcompensating for risk. But it is important to be selective. We are watching carefully for buying opportunities in areas that are selling off too aggressively.

■ Fixed income

We will reduce any holdings in assets that are rallying to unjustifiable levels, such as bonds. US Treasury yields have fallen sharply, but it seems Fed policy, rather than Brexit, will affect those more. We would expect Fed policy to be influenced more by the facts about the domestic economy.

■ Property

It is vital to remember that there are other dynamic factors besides Brexit that have different feedback mechanisms that come into play. We remain happy to hold modest exposure to commercial property at fair value as an extra diversifier within our global multi-asset funds.

Marino Valensise, head of multi-asset and income, Baring Asset Management

■ Equities

Over the past year we have cut back our UK equity exposure, especially in the FTSE 250. But we carry a significant position in European equities, which have been a preferred asset class. These have been marginally trimmed in the past few months, given the risk posed by Brexit.

■ Fixed Income

This year has seen the rebound of US high-yield credit and we believe this asset class will continue to be a good investment opportunity. As we transition into a risk-on environment, we are likely to up our high yield exposure first and look to other asset classes to provide additional income.

■ Property

We reduced our property exposure in the run-up to the referendum and are now considering doing more. We believe this vote is extremely damaging to the UK economy. We will be reducing our UK property position as the asset class is seen at risk.