How to protect your stocks and share Isa from geopolitical risk

This matters to all clients invested in UK stocks as the FTSE 100 faced a tumultuous year in 2018 and fell by more than 12 per cent year-on-year, data from the London Stock Exchange shows.

Geopolitical volatility 

Heather Owen, financial planner at Quilter Private Client Advisers, says: “The most direct impact investors are likely to see on their stocks and shares Isas is increased volatility – movement in the overall value, whether it’s down or up.”

She adds: “A well-diversified investment will see your money spread across different regions around the world, as well as different types of investments – anything from wheat, to commercial property, to FTSE 100 companies, to government bonds.” 

I don’t see political or economic uncertainty as a good reason for putting off making Isa subscriptions or, in fact, for changing the investment strategy.Jason Witcombe

Frazer Fearnhead, chief executive of The House Crowd, agrees with Ms Owen's view that diversification is needed.

“Stocks and shares Isas are, by their nature, quite volatile. So in times of geopolitical tension investors' best bet is to diversify into alternative investments that have less volatility,” explains Mr Fearnhead. 

Darius McDermott, managing director of Chelsea Financial Services, highlights the adverse impact Brexit has already had on the UK’s investment sector. 

“According to the Investment Association, the political and economic uncertainty led to a sharp drop in retail fund sales: net retail sales in 2018 were £7.2bn, in comparison to £48.5bn in 2017,” he says. 

Mr McDermott adds: “UK equity funds were particularly hard hit, with outflows of £4.9bn and the UK All Companies sector [UK growth sector] was the worst-selling sector overall. Add to this the fact that overseas investors are also shunning UK equities, and you can see the impact Brexit has had.”

Mr Fearnhead suggests: “The continued popularity of stocks and shares will therefore depend significantly on levels of volatility and the changing geopolitical landscape.”

But Jason Witcombe, a chartered financial planner at Progeny Wealth, thinks the geopolitical risks affecting stocks and share Isas are overstated. 

He explains: “Right now, Brexit is on many investors’ minds but next year it may be something different.

"I don’t see political or economic uncertainty as a good reason for putting off making Isa subscriptions or, in fact, for changing the investment strategy."

Alternative investments 

Many have suggested that investing in an alternative asset class may be the way forward to reduce the impact of geopolitical risks on stocks and shares held in Isas. 

Mr McDermott says: “The uncertainty can have two major impacts: the first is that people simply stop investing; and the second is that, if they do invest, they pick asset classes that are deemed to be less risky.”

He believes investors will favour investing in global equity funds and multi-asset funds over stocks and share Isas. 

He adds: “I should imagine this pattern will continue, and cash Isas are likely to be more popular than stocks and shares Isas once again this Isa season, as we are still no closer to getting Brexit sorted and the deadline is pretty much at the end of the tax year.”

Mr Fearnhead explains: “A good example would be the Innovative Finance Isa, as it is based on investment in loans, rather than in stocks and shares that are at the mercy of geopolitical and economic movements.”

He adds: “Innovative finance Isas offer a genuine alternative for those who want to earn a decent return on their money without the risks and volatility associated with the stock market."

At the end of 2017, Funding Circle, a business loans platform, launched its Innovative Finance Isa. 

The firm projects returns of 5.5 per cent to 6.5 per cent, which it claims is up to seven times higher than the average instant cash Isa. 

“Investing in a stocks and shares Isa could help people reach this target even more quickly, but extreme price movements are common. For example, last year the FTSE 100 fell by more than 12 per cent,” Funding Circle stated. 

Should you switch Isa? 

Mr Fearnhead says: “When it comes to cash Isas, I believe interest will continue to fall as people realise there is little or no benefit to them, and as awareness of alternative options grows.”

Mr Witcombe acknowledges that even for those who are risk-averse to holding stocks and share Isas, cash Isas may not be be the best solution. 

“The problem with leaving lots of money in cash is that it is likely to get gradually eaten away by inflation. So, investors need to decide which risk they fear most,” Mr Witcombe suggests. 

Mr McDermott says: “The biggest risk for me is that people simply don't invest and they lose their Isa allowances. History shows that the best time to invest is often when investors are most fearful, but this is easier said than done."

He adds: “I'd suggest that, if investors are worried, they invest in a cash Isa now to secure their allowance and switch it at a later date – they can always drip feed the money into the market instead of in a lump sum too.”

saloni.sardana@ft.com