How to position investment portfolios post-Brexit

Noland Carter, chief investment officer at Heartwood Investment Management, comments: “In coming months, there will be more uncertainty for investors.

“Political risk premia will remain high across markets, economic growth will be vulnerable in the near term for both the UK and the Eurozone, and there will be increasing questions about the effectiveness of central banks’ policy responses.”

Since the beginning of the year, Mr Carter said Heartwood had been reducing risk in its portfolios to reflect concerns about many issues, including Brexit, and has been holding higher levels of cash as a result.

Domestic

FTSE 100 followers will have been happy on 11 July after the blue-chip index entered a technical bull market.

It closed at 6,682.86, up 1.40 per cent on its starting price, which is more than 20 per cent higher than its recent low of 5,537 reached on 11 February 2016.

According to Laith Khalaf, senior analyst for Hargreaves Lansdown, the FTSE was “tipped” into a bull market by the emergence of Theresa May as prime minister, after Andrea Leadsom MP pulled out of the race on 11 July.

He commented the whiff of some loose monetary policy coming from the Bank of England also probably helped the index over the line too.

Mr Khalaf says: “The role played by the commodity behemoths should not be under-estimated either, these stocks are now trading at much higher prices than in the depths of the market in February.”

But not every blue chip has enjoyed the last five months, with approximately three out of every 10 FTSE 100 stocks still below their 11 February price, including some banks and airlines.

A flexible and objective approach is crucial to investment success in these conditions, as well as the ability to be adaptive and light on your feet Andrew Wilson

In particular, high-street banks suffered significantly the day after the Brexit outcome was announced.

Lloyds Banking Group, Barclays and Royal Bank of Scotland, each saw drops in the share price of 30 per cent or more as markets opened on 24 June.

Yet although the blue-chip index is showing an incredible bounce overall, the FTSE 250 - a bellwether for the state of the UK economy, given its broad domestic bias - is still struggling to recover the losses made on 24 June.

Some investors on 24 June saw a buying opportunity in the UK stock market. According to data from Hargreaves Lansdown, 80 per cent of the trades placed on its share dealing service on the day were for purchases.

Mr Khalaf says: “Private investors were out in force bargain-hunting. We know investors had been sitting on the sidelines until after the referendum and there was buying activity when the market dropped.”

While some investors may have seen the immediate sell-off as good buying opportunities, others panic-sold out of investments.

Yet as Andrew Wilson, head of investments at Towry, says, it is important not to over-trade, especially as although the UK’s future may be “opaque and challenging”, he says, “it is not without hope”.

Mr Wilson explains: “One must not over-trade or change investments on an emotional basis.

“Long-term positions can quickly no longer make sense, while an asset class that had not been on your radar suddenly becomes attractive.

“A flexible and objective approach is crucial to investment success in these conditions, as well as the ability to be adaptive and light on your feet.”

Abroad

Overseas markets also reacted wildly in the aftermath of the Brexit vote. As at close of play on 24th June, the Euro Stoxx 600 closed down 7 per cent.

The S&P 500 index of the largest stocks in the US fell 3.6 per cent. According to data from FT.com, this was the index’s biggest one-day drop since August. Japan’s Topix finished 7.3 per cent lower, while the Nikkei 225 dropped 7.9 per cent.

The effects were felt as far afield as Australia, where the ASX index closed down 3.2 per cent.

Although there have been bounce-backs in most markets since the end of June, some managers and advisers remain cautious about the outlook for European equities and bonds.

We have always preached the value of a well-diversified portfolio and this is an example of a time when diversification is important Martin Bamford

Heartwood’s Mr Carter says one immediate post-Brexit response would be to reduce exposure to European equities, and potentially add to US Federal Reserve-sensitive assets such as US treasuries and emerging market sovereign debt.

Lee Goggin, co-founder of FindaWealthmanager.com, says: “The next few months are going to be volatile.

“Do safe haven assets such as gold have a place in our portfolios? Should we be ditching UK stocks and buying the US dollar?”

According to Patrick Armstrong, chief investment officer at Plurimi Wealth, “With the uncertainty created following Brexit, we believe defensive interest-rate sensitive stocks in the US are now attractive, given the lower-yield environment.

“We have been adding to US healthcare and US telecom companies, based on their attractive yield and insulation from the likely European economic downturn.”

“Post-Brexit”, says Michael Lally, director of Thesis Asset Management, “Our view is not to panic but be prepared for more bad days as we believe markets have yet to fully discount the impact of Brexit, combined with the existing global slowdown.

“With so many short-term uncertainties, we are adopting a highly flexible stance with a view to capitalising on any significant moves in either direction in the universe of markets and asset classes in which we invest.”

Keep calm

Keeping calm is the main message being sent out from advisers and investment managers alike. “Educating clients to avoid making any knee-jerk reactions to falling equity prices is important”, says Martin Bamford, chartered financial planner at Informed Choice.

He adds: “Our advice to clients is to sit tight. Those who have the capacity for risk and some spare cash might consider short-term dips in the market to be a buying opportunity.

“But our role as financial planners is to keep clients focused on their short-term financial goals, reminding them why they exposed capital to risk in the first place.

“None of our clients are solely exposed to equities, or indeed to UK assets. We have always preached the value of a well-diversified portfolio and this is an example of a time when diversification is important.”

Peter Michaelis, head of investments at Alliance Trust Investments, says: “The initial volatility we are seeing throughout global markets will give way to calmer reflection on what it means for the long-term prospects of the companies we invest in.

“However, beyond short- to medium-term volatility, companies exposed to long-term structural growth trends will continue to thrive”.

Tim Sargisson, chief executive of Sandringham, comments: “‘Keep calm and carry on’ is a well-worn cliche but it does apply here.

“Advisers take a medium- to long-term view and what needs to be understood is what we are witnessing at the moment is the immediate response, and does not provide the basis for how this will play out over the longer-term.”