What does Brexit mean for you?
Unless you have been living under a rock since June 2016, you would have seen the word Brexit at the forefront of many newspaper articles and news bulletins. It has been hard to escape the ever impending British exit from the European Union, but what does Brexit mean for you? Will it impact you and if so how can you be ready for any financial implications that may occur.
Deal or no deal!
The UK and EU have agreed to extend Article 50 to October 31st. Article 50 is basically a plan that was put into place in case any country wished to leave the EU. As Article 50 has been extended this means the UK will remain in the EU until that date unless in the meantime the UK parliament passes a Withdrawal Treaty which would allow the UK to leave the EU at an earlier date. So far however the UK parliament has failed to pass the existing Withdrawal Treaty on three separate occasions and has also failed to propose a new plan which the majority of MP’s are willing to accept. Given the difficulties in finding common ground among MPs, the possibility of a general election and/or a second referendum is high.
Investment markets currently appear to be leaning more towards the fact that a ’no deal hard Brexit’ outcome is unlikely and are suggesting a ‘softer Brexit’ will be achieved. Assuming a deal is eventually agreed by the UK parliament which is acceptable to the EU and which will have a transition period to at least the end of 2020, the impact on markets is expected to be quite modest. Sterling may strengthen slightly to 0.84/0.85 from the current level of 0.8625 as seen in the EURGBP exchange rate. This will be due to the removal of some uncertainty and also due to the likelihood that the Bank of England could raise interest rates over the next twelve months on the basis of a deal being made. There could also be some modest upside in UK Equities of 2/3%. European equities would be expected to be more modest at around 1%. It would be expected that there would be little or no impact on global equites markets as Brexit is more of a local issue than a global one with the UK only accounting for 4% of the global economy.
If a second referendum were to be called and the vote was to remain in the EU, then UK equities could rise 5/10% while sterling could strengthen significantly to 0.75 on the EURGBP exchange rate. If the vote in a second referendum was still to leave the EU, the market impact would be based on what form of Brexit was voted for in the referendum. A vote for a softer Brexit would be more positive for both sterling and UK equities while if a harder Brexit was voted for then both sterling and UK equities could weaken on the back of this result.
If the UK parliament cannot agree on any deal before October 31st then, unless the EU agrees to a further extension, the UK could leave with no deal on October 31st. This would result in a “hard Brexit” and UK equities could fall -5%/-10% given the risks to UK growth, and sterling could also fall sharply. The impact on the Irish economy from a hard Brexit could be significant given how dependant we are on the UK. With 16% of Irish exports going to the UK, exports could be negatively impacted with a weaker sterling and potential new World Trade Organisation tariffs, expected changes in trade regulations and the difficulties caused by new customs processes. At the moment 86% of international freight traffic in Ireland is coming from the UK. Specific sectors such as agriculture with 45% of exports going to the UK and tourism with 35% of international visitors coming from the UK could be particularly negatively impacted by a hard Brexit.
The above is based on assumptions from an Irish Life Investment Managers (ILIM) economist, and should not be taken as a reliable guide to the future performance of the investment markets.
Source: ILIM, April 2019
How to prepare for the unknown
After Brexit was announced, the sterling fell to its lowest point in 31 years. Nearly 2 years on, the pound is still weakening against both the dollar and the euro. So what does this mean for us as investors? With all the uncertainty surrounding Brexit, and its consequences, how do you reduce the risks and the uncertainty when it comes to your money? The three principles below are key
- Diversification means spreading your money across a wide range of asset classes for example and geographical regions, so that if one type of investment doesn’t perform well then at least you only have a small portion of your money invested in it. You can read more about the benefits of diversification in our blog post "Strength in Diversity".
- Risk Management –Currency plays a massive part in our finances, take for example if you invested in a property fund that has property in the UK in its portfolio: you can be exposed to the risk of the sterling weakening. Some fund managers try to protect against currency fluctuations. This is called currency hedging. Here in Irish Life, our Multi Asset Portfolio funds (MAPS) which are a range of unit linked funds available across our pension, investments and savings plans, all have a currency hedging. While any funds that invest outside of the Eurozone may be affected by changes in currency exchange rates, the currency hedging means the risk is reviewed regularly with changing market circumstances. You can read more on currency in our post "Why currency is important when investing?"
- Professional fund management – knowing your fund is being looked after by a team of professionals working on your behalf, is vital in times that may bring some volatility to the market. Irish Life Investment Manager (ILIM) is our appointed investment manager for the MAPS funds. To find out more about how professional fund management works see our article "What do investment fund managers do? "
As with any investment that has no guarantee, you can lose some or all of your money and the value of your investment may go down as well as up. However, multi asset funds can be an easy way to achieve all three of the above principles – see blog What is a multi-asset fund.
To find out more about Irish Life’s Multi-asset portfolios, see here.
What can be done to protect your finances?
We would always recommend that you speak to a financial advisor before making any investment decision. During times of uncertainty people can act irrationally but speaking with a person who is informed and who can carve a financial plan which is suitable just for you is the best way to protect your finances.