Investments  

Russell Taylor on investors' options as a Brexit endgame approaches

Russell Taylor on investors' options as a Brexit endgame approaches

What risks do investors face in 2019? They are becoming aware that economic growth is slowing. Tax deals powered recent US growth, but trade wars based on “America first” rhetoric are muting business spirits, and political wars between Democrats and Republicans are withholding the necessary co-operation on infrastructure spending and other needed reforms. 

Europe has once again failed to take off in any meaningful way, held back by the deflationary discipline of the eurozone. Even the German powerhouse is stuttering as its pre-eminent car-making business is hit by the double whammy of a dying diesel business and the complexities of the electric and self-driving future. 

China itself is discovering the difficulties of switching from an export-orientated economy to one focused on consumer demand, as well as much lower saving rates. This extremely difficult transition is not helped by a US trade war, as well as the poor feedback mechanisms in its command and control economy. And much of the rest of the world is either enmeshed in war or trade sanctions of their own.

Economic growth and stock markets 

Fortunately, there is no direct correlation between economic developments and stock market success, so equity markets are still riding high, even if extreme events – akin to those taking place in relation to the climate – are happening more frequently as investors become more nervous. 

As quantitative easing is replaced by tightening, the expansion of low-quality bond issuance may become more difficult. For the moment, however, there is no liquidity crisis; there is nervousness but no fear.

This could all change if politicians make mistakes, as seems all too likely with the Brexit endgame now approaching. If they do, then British investors will face an old enemy – inflation. 

Those with memories of the 1960/70s and pre-EU Britain will recall how difficult it was to eradicate inflation from a not particularly competitive economy. 

Even with an agreed exit from the EU – currently looking less and less likely – the chance of temporary shortages and rising prices as trade connections of more than 40 years standing are broken or disrupted are high. With no deal at all this becomes a major risk. 

Inflation risks

Consequently, UK investors must remain invested in equities, with their rising incomes, but not in British companies. Even this government accepts that Brexit will be bad for GDP, and it seems unlikely that the exchange rate can remain at current levels. 

None of this can be good news for the FTSE, so my anti-Brexit portfolio (outlined in Table 1) is designed to keep the ‘best of British’ while reducing equity exposure to the country. These are all low-cost investment companies invested in the disruptive industries of the future; their small UK exposures should comfort the investor but concern the more gung-ho Brexiteer.

Table 1: An anti-Brexit portfolio update

Investment company

Initial investment at December 31 2018 (£)

UK exposure (%)

YTD share price total return (%, to February 8)

Witan

25,000

33.5

3.6

Alliance Trust

25,000

15.1

5.4

Personal Assets

15,000

10.1

0.8

Scottish Mortgage

15,000

3

3.6

Worldwide Healthcare

10,000

0

8.4

Polar Capital Technology

10,000

1.4

8.7

FTSE All-Share

n/a

n/a

4.2

MSCI World index

n/a

n/a

3.8

Source: AIC/Morningstar. Copyright: Money Management

 

Investment that works

Yet for those who think that Brexit presages a glorious future for global Britain, there are plenty of alternative choices among investment companies. 

This year alone five members of the Association of Investment Companies celebrate 130 years of successful life, while two reach their 110th birthdays. The five are Merchants, Edinburgh, British Empire, Law Debenture and BMO Global Smaller Companies; the two are Scottish Mortgage and Witan.