How will a no-deal Brexit affect your finances?

With the UK’s leaving date looming ever closer, and so much still up in the air, it’s likely that you’ve been wondering exactly how a no-deal Brexit will affect your finances.

You might even be putting off making important financial decisions or considering if there’s something that you can do right now in order to ‘weather the storm.’ Our view remains the same, we are investing to meet long term goals and we have to focus on those goals and try not to be distracted by short term political and domestic difficulties.

In this article, Chartered Financial Planner, Mark Reidford shares some of the most common questions his clients have been asking about Brexit and our views. It’s likely that these questions will have crossed your mind too so we thought it would be useful to share his answers with you.

Q. How will Brexit affect the economy?

A. The vast majority of economic projections suggest that Brexit will harm UK economic growth in the short term. Economic growth has been weak so far this year and this is most probably due to the uncertainty surrounding Brexit.

The Bank of England has warned that Britain has a 1 in 3 chance of falling into a recession by the end of the first quarter of 2020, even if a Brexit deal is reached. It also reduced its growth forecast for 2020 from 1.6% to 1.3%. On a more positive note, the forecast for 2021 has been raised from 2.1% to 2.3%.

We believe that the market consensus on the outlook for the UK is too cautious. Looking forward, we see UK economic health improving, with more people in work, more wage growth, more investment spending, better public finances and a continued recovery in manufacturing and exports.

We believe the UK economy is capable of continuing to grow by annual rate of 2% or more, irrespective of the outcome of the Brexit negotiations. This is a considerably better outcome than the recession that some of the more pessimistic commentators are forecasting and what is clearly priced in to equity market valuations. It will also compare very favourably with most other major economies, many of which are rapidly losing momentum amid increased political risks and tighter monetary policy.

Q. So, what about Sterling, interest rates and inflation?

A. The good news is that the pound finally saw a modest boost against the euro at the end of September, following a bumpy few months of declines. This increase was largely due to the weakness of the German economy.

However, as negotiations rumble on and the possibility of a no-deal Brexit seems more likely, the pounds’ performance could continue to be negatively affected.

The weakening of the pound could also drive up inflation by increasing the prices of imported goods. A no-deal Brexit might also see Central Banks forced to cut interest rates in order to support the economy. However, with savers enjoying interest rates of less than 1% over the last 10 years anyway, this is unlikely to make a noticeable difference.

Q. How will Brexit affect house prices and other bills?

A. It’s very difficult to predict what will happen next in terms of houses prices. Both dramatic inflation or a sudden price crash seem possible. However, the basic drivers for inflation (i.e. limited supply and high demand) remain unchanged for now. If you’re a homeowner, house price growth is likely to come as welcome news whilst also making re-mortgaging both easier and cheaper. First time buyers, on the other hand, may find it harder to save a sufficient deposit to get onto the property ladder.

Brexit could also affect household energy bills. One of the key issues is the UK’s increasing reliance on interconnectors that carry gas and electricity between countries. Trade by these interconnectors could be less efficient when the UK leaves the EU and a new trading agreement will be required. On the other hand, VAT could potentially go down but it’s not clear whether these savings would be passed onto us.

Other common concerns of British consumers include what will happen to mobile roaming charges. At present, most major operators have announced that they have no plans to reintroduce these for customers who are visiting EU countries. Car insurance however may no longer include third party cover for driving in the EU. Moving forward, a green card (international certificate of insurance) may be required.

Q. What direction do you predict the stock market will go in?

A. Predicting the short term direction of any stock market is extremely difficult and not something that we would recommend. In addition, you should certainly not buy a portfolio based on yours or someone else’s Brexit predictions. This could easily lead to disappointment should the market take an unexpected turn.

It is worth noting though that the performance of the stock market is not an automatic reflection of how the economy is doing. 2009 (during the financial crisis) was the worst year for the economy since 1921. Yet, by the end of the year the FTSE All Share had recovered all losses by growing over 30%. As we’ve said before, past performance is not a guide to the future.

Our long term planning takes advantage of the fact that markets always deliver in terms of investment returns, even when short term issues may cause investors to feel a little uncertain.

Q. What about my investments? Should I wait until after Brexit to invest my money?

A. Like many investors you may be worried that a bad Brexit outcome will hurt the UK stock market. Therefore, you may be tempted to put off important financial decisions until things become clearer. However, with no guarantee that the potential risks will materialise, this approach could see you miss out on the current low share prices and any gains resulting from a better than expected outcome.

For this reason, we would suggest investing some money now but holding onto the rest whilst things remain uncertain. Whilst the best returns may be missed, you will also be avoiding the biggest losses.

Investing over time, rather than all in one go, helps to smooth the ups and downs of the stock market. The investment phasing strategy is one we often recommend, not just for Brexit!

Q. Should I sell UK holdings and invest overseas instead?

A. No. If the value of the pound continues to fall, it’s true that investments with exposure to overseas currencies have the potential to do well.

Our long term investment strategies are already widely diversified with exposure to a wide range of markets and asset classes and are well placed to benefit from currency movements.

It should also be remembered that in excess of 80% of earnings for the companies listed on the FTSE 100 are generated outside the UK and a fall in the value of the pound generates its own positive investment momentum when these companies repatriate their profits.

Q. What will Brexit mean for my retirement?

A. If you’re a long way off retirement then the good news is that time is on your side. You should continue to focus on your long term plan and ride out any short-term ups and downs and see them positively as a buying opportunity.

If you are near to retirement or in retirement, communication and planning are key; understanding our clients’ plans and objectives (what they want in retirement and when they want it) enables us to arrange a number of investment strategies to meet their objectives so that they too can focus on the long-term plan and ride out any short term ups and downs.

We don’t expect the rules surrounding Drawdown to change when we leave the EU. So, drawdown customers will remain in control of their money, where it is invested and their withdrawals.  For drawdown clients we will continue to review our clients’ pension and investment portfolios to ensure that they are well diversified.

When considering your pension options, we always recommend a ‘best of both’ approach. This involves using a combination of guaranteed income (State Pension, Final Salary pensions and annuities) and drawdown which provides both fixed and flexible income. This can provide a stable income for essential spending and the potential for additional income for discretionary spending. As part of this overall planning, an investor should always retain sufficient cash holdings to act as a contingency reserve. The client’s cash position should allow them to invest and shoulder market volatility with confidence.

Conclusion

Investing is complicated – even more so when you throw the uncertainty of Brexit into the mix.

Many expert projections suggest that Brexit will adversely affect the UK economy, Sterling and the stock market in the short term. However, as outlined above perhaps it’s not all doom and gloom, although at the moment the only thing that is certain is ‘uncertainty.’

Investors should always focus on what they can control by reviewing their existing investments to make sure they are suitable for their long-term goals. It’s sensible to phase or ‘drip feed’ cash into your investments and diversify across both UK holdings and investments overseas.

Those who are a long way off retirement should sit tight for the time being as time is on your side and if buying remember market volatility is in fact your friend.

If you are closer to retirement or in retirement, remain engaged in the advice process, communicating and planning with your Independent Financial Adviser to stay focused on the long term goals and finding ways to deal with short term uncertainty.

Mark’s Top Tip

One of the best ways to avoid stress when it comes to long-term investing is to make less frequent observations of one’s portfolio. Prospect Theory states that humans feel the pain of financial loss more sharply than they enjoy the benefit of an equal financial gain. Thus, in the short-term at least, if stock markets’ daily movements are often random, there could be as many down days as up days, leading to a recurring feeling of disappointment. With this thought in mind avoid checking valuations too frequently and focus on the long term.

Troubled by Brexit?

It can be extremely difficult to know what strategy is right for your goals during times like this. If uncertainty is causing you to worry about your finances, now could be the perfect time to talk to one of our friendly experts.

The experience, expertise and knowledge of one of our Financial Advisers can provide confidence and peace of mind. Call us on 01244 347 583 or email us at: info@innesreid.co.uk. Initial consultations are free of charge.

DISCLAIMER: The content in this article is for informational purposes only and is not advice. Remember all investments, and the income they produce can fall as well as rise so you could get back less than you invest.  You should consult a Chartered Financial Planner regarding your individual circumstances before taking action.