With Brexit uncertainty still hanging over the UK, investors may be scrambling to invest their money overseas, in various asset classes, or not at all, to minimise their exposure to the stock market.
It is all too common for clients to panic during times of political and macroeconomic upheaval, pulling money out of investments in the belief cash will be a better store of value.
But before clients do anything, it is worth considering how much value there is in holding cash. Could it be a useful strategy at this time or any other?
Is cash king?
Udit Garg, head of wealth management at Sun Global Investments, says: “Cash is a long-term strategy and [yields] very low returns. Dependent on circumstances, I wouldn’t allocate more than 30 per cent [to cash] under any scenario.”
He adds: “However, when it comes to short-term investment opportunities, under the Brexit scenario, hedging against the pound could be an interesting bet.”
Clients should bet on the euro and convert it back into pounds depending on the Brexit outcome, suggests Mr Garg.
Andrew Rees, investment manager at EQ Investors, also questions the value of holding excessive amounts in cash.
“I would be hesitant to hold too much cash in portfolios with the possibility of a Brexit outcome so close. While many believe that cash is the most defensive asset available, we see risks to holding sterling cash in certain outcomes,” he explains.
MPs voted down Prime Minister Theresa May’s deal earlier this month, by a smaller margin than the first defeat in January, but this prolonged the uncertainty around the UK’s departure.
The defeat has prompted a number of additional votes to be held. The EU has agreed to extend the Article 50 period until April 12 at least – though this depends on whether MPs approve Mrs May’s deal in a third vote, at the time of writing.
Flight to safety
Mr Rees believes that remaining invested in the FTSE-All Share index provides greater diversification than holding cash in terms of Brexit.
A weaker pound is, in fact, a positive driver of growth for FTSE 100 companies as those in the index derive the greater part of their earnings from overseas.
On the topic of the FTSE, Mr Rees also says:
- Remaining invested in the FTSE All-Share provides a level of diversification. A no-deal scenario will likely see sterling fall, in which case he expects those large-cap constituents predominantly exposed to foreign currency earnings (such as BP or Diageo) will likely perform well.
- If the withdrawal agreement passed, or Brexit was cancelled, this would likely result in positive performance of the UK domestic-focused mid-caps within the index.
David Coombs, fund manager of the Rathbones Multi-Asset Portfolio Funds, says investors need to consider that cash will clearly not move in nominal terms when financial markets fluctuate, but will equally not provide any positive return to portfolios if equities fall.
“Some other safe-haven assets, such as government bonds, would be likely to provide more material positive support during a flight to safety. We look to balance cash exposure with other safe-haven assets to tackle this,” he explains.
Adventurous or cautious?
Several others share the view it is more more important for clients to diversify into safe haven assets, such as bonds and gold, rather than hold too much cash in times of turmoil.