Mark Potter

Having been pretty nervous and indeed pessimistic about the direction of stock markets for nearly 12 months now, I am beginning to think about what investors ought to do now we are very close to getting a resolution of some sort (ie more certainty about what will happen) on Brexit.

Once any really concrete decisions are made, currency and stock markets will react very fast, so it will pay investors to have at least thought about what options they have for action. I am assuming that most sensible investors will have taken some profits from their portfolios in 2018 or even this Spring and have some cash to invest. Those who do not still need to think about the implications for their asset mix and fund holdings.

Forming a policy for action is in my opinion a process: I don’t have any magic intuition as to what to do! So a starting point is to consider possible scenarios and then assess the way they might, most probably, pan out.

For this post, as a starting point, I am going to over simplify a little and suggest there are two possible situations after a final Brexit plan is settled (or possibly even no Brexit!). One is that the markets are relieved and like the outcome and the other is naturally that they are horrified and there is a ‘flight to safety’.

If the former situation prevails, the pound will likely strengthen and UK shares may come back into favour – the shares in the UK outside of the big global players in the FTSE 100 are oversold (ie cheap) at the moment. That would suggest it would be a good time to buy global stocks as they will be cheaper and my judgement, a rising pound would be short lived as reality sets in. As a result the overseas stocks will benefit from a windfall gain in currency terms later on. Some selected UK funds would look like a good bet too – those most hammered in late 2018, broadly investing in ‘value’ shares.

If the markets sell off and the pound tumbles, then it would be unwise to invest in shares valued in other currencies using a low value pound and there will likely be the afore-mentioned cheap investments to be bought in the UK, but they could be at real bargain prices. This is based on the observation that markets over-react to major changes in the global economy.

As to fixed income holdings (bonds), these are likely to benefit from extra demand if investors are really worried. That would push prices up. However, they are already expensive. It is also hard to know in what direction central banks will move interest rates in either scenario (not at all would be the highest probability in my view), so that is a good reason for not buying into bonds – there is a risk of sharp losses if interest rates rise more than the market has allowed.

In summary, I see opportunities to put cash to work as soon as we have decisions clear enough for markets to re-position. But I would not join any reaction of fear by buying bonds and that means avoiding most cautious managed funds.