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Investing in 2018: The Brexit Effect

by Jonathan Adams

It can be reasonably argued that ‘Brexit’ was the biggest single factor influencing investment and finances in the UK over the course of 2017. The uncertainty meant the London Stock Exchange’s benchmark indices, while not performing poorly in an historical context, didn’t have the same bumper year as peers in the USA, much of Europe and swathes of Asia. Inflation rates quickened to slightly above 3%, a five-year high. This was largely linked to the fall in the value of pound sterling in the wake of the Brexit referendum vote as our weaker currency made imports more expensive.

However, the pound did stage a bit of a recovery as markets appeared to come around to the conclusion that there appears to be no imminent danger of the sky falling in. That was further supported by the Bank of England acting to trigger the first interest rate rise in a decade with the base rate hiked to 0.5% from 0.25%. While also clearly a mechanism to curb more significant inflation, raising interest rates was a further indication that while all is not rosy in the UK’s economy, things are also not all that bad, at least for now.

2018 is set to be another year where Brexit will be at the centre of our financial landscape. Last year was split into several Brexit stages. First was fixing a date and the lead up to Article 50 actually being triggered, we had a snap general election and then the first stage of negotiations, focused on the controversial ‘divorce package’ to be paid by the UK. In theory, 2018 will be purely focused on negotiations, with the eventual trade agreement or lack of one the central narrative. And we should get more clarity on when the final date we leave will be. But there is plenty of opportunity for further ‘curve balls’. Most notably another General Election if Theresa May doesn’t quickly get a handle on her government or even the slight but not impossible turn of events of a second referendum.

So, for those investing online over the course of this year, what are the main factors and influences to look out for expected to be and the potential scenario?

Despite a dip this week, things have been generally going well for the companies listed on the LSE lately. 2017 saw returns lag those of many other international stock exchanges as Brexit uncertainty seemed to lead to hesitancy around investment in the wider ‘UK Plc’. However, it was only really a disappointing year within the wider international context of booming stock markets and strong gains over December put a shine on things. The first couple of weeks of January were also bright and many analysts believe that if Brexit negotiations see some positive progress over 2018, some of those returns missed out on last year could roll over into this one.

Last year internationally-facing companies generating most of their revenue in currencies other than pound sterling did significantly better than those with a strong domestic focus. Positive Brexit negotiations progress in coming months could then give domestically-focused stocks a strong boost. However, a strengthening pound might then weigh on the FTSE 100’s larger international companies to an extent. That should, however, be offset to a large extent by general positivity if it looks like we’ll avoid the ‘hard Brexit’ financial markets appear to have been pricing in.

But generally speaking, for those investing in ISAs and SIPPs with online stockbrokers, faltering Brexit progress can be expected to be bearish for smaller UK-focused companies in the FTSE 250 and below. This scenario would, however, be expected to hit the pound’s value again and potentially boost the FTSE 100, mirroring the post-referendum effect.

A course veering towards hard Brexit hitting the pound’s value would also be expected to roll over into inflation pressures. Whether interest rates could be hiked again in that environment is doubtful so a greater weighting towards inflation-protected assets would be a good call. Commodities such as gold and oil and traditional inflation hedges and stocks with a focus on staple FMCGs, telecommunications and utilities traditionally do well when inflation rates are higher.

If further interest rate hikes start to look likely, financials would be expected to benefit. The Federal Reserve in the USA is also expected to raise interest rates around 3 times this year, which would also boost financial stocks in the UK, particularly those with the most international exposure.

And finally, in the event of another General Election, which would probably make Labour favourites, batten down the hatches. The markets down like Jeremy Corbyn and whatever your political views, at least in the shorter term this would be expected to lead to a bearish stock market mood.

Whichever scenario eventuates, the online investment waters look like being choppy in 2018. Keep an eye on Brexit progress, inflation rates and the strength of pound sterling and react accordingly. Bon voyage!

This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

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