The UK is leaving the European Union. Our in-house investment experts share their insights into how Brexit might impact your long-term financial goals and what you need to consider.
The journey to leaving the European Union has firmly begun – even if the destination remains unclear.
Markets typically don’t react well to such major events, but the slow path taken towards the break-up of the UK and EU has minimised the immediate impact. That may change as we get deeper into the negotiations.
Indeed, many markets have performed well over the past year, with the FTSE 100 in particular consistently above 7,000 points during 2017. Mitch Hargreaves, money market analyst at Skipton Building Society, says the policies pursued by many central banks around the world have helped buoy markets.
“The weakening in Sterling following the EU referendum and the subsequent cut to the Bank of England’s base rate has had the effect of boosting many large businesses that generate significant amounts of their profit outside the UK. It has also fuelled a rise in inflation," he says.
How will a Hard or Soft Brexit affect markets?
One of the largest benefits of being part of the EU is membership of the single market. It allows British businesses to trade goods with the rest of the EU without paying tariffs.
With the EU accounting for almost half of all UK imports and exports, exiting the single market could have huge ramifications. However, remaining within it could involve agreeing to other terms such as ongoing freedom of movement between UK and EU nationals.
Read more from retiresavvy:
There has been a great deal of debate about whether the UK should be looking for a Soft Brexit (keeping some form of single market membership, in return for a degree of free movement), or a Hard Brexit (no single market access), with varying shades in-between.
Scott Ashworth, Skipton’s senior technical research adviser, says: “Right now, nobody knows which way the talks will go. The more likely it appears that Britain will remain in the single market for trading – a softer Brexit – the more positive markets are likely to remain, at least in the short-term, especially in Sterling terms. However, there is a long way to go before we truly know the route to be taken.”
How will Brexit affect Britain’s trade relationships with the rest of the world?
The main focus of the current Brexit talks centres around access to the EU’s single market, but another crucial consideration for markets are the trade deals the UK has with other, non-EU countries.
At the moment the UK is not able to negotiate separate trade deals with individual countries, but exiting the EU will give it the freedom to do so.
In July, Theresa May met Donald Trump, who declared a trade deal between the two countries could be completed “very quickly”. A favourable agreement here could boost some sectors and businesses, as America is the UK’s second largest export market after the EU.
Other countries that might be high on the list to develop a new trade deal with are China, India, Australia and Canada, which also import and export billions of pounds worth of goods with the UK.
There is also the question of whether the UK will be able to retain existing free trade deals the EU enjoys with other countries, such as South Korea and Mexico.
Scott explains: “The EU gives UK business preferential treatment to over 50 countries outside of the EU, which has enormous economic advantages.
“If exiting the EU means the UK can no longer benefit from these trade deals, it could have a notable impact on markets. The government will need to negotiate separate agreements with each of these individual countries, but technically isn’t allowed to start any such talks until after Brexit.”
What happens if a Brexit deal can’t be agreed?
Under the terms of Article 50, if a deal can’t be reached over Brexit by the end of the two-year notice period (29 March 2019), the UK will still exit the EU.
“The UK’s Brexit negotiating team are bargaining with 27 other countries to secure a favourable deal. Ultimately, all 28 nations have to be in agreement – so even if one or two go against the proposal, the deal will stall,” Scott says.
In the event of a no-deal, the government suggests the UK would fall back onto World Trade Organisation (WTO) rules. This effectively means every other nation must be treated equally – there can be no favoured countries – and would likely lead to British businesses facing tariffs to trade goods and services overseas.
What do global markets think?
Brexit looms large over our lives in this country, and is undoubtedly viewed as a major development in other countries. However, the reality is that it is one of many global events occupying markets.
For investors, Brexit also highlights the value of building a diversified portfolio of assets from around the world. By having exposure to a number of different global markets, you can take advantage of positive performance in other regions to boost your overall returns. In contrast, having investments in only tied to the UK means your holdings will more closely mirror its ups and downs.
There are different approaches investors could take to achieve a globally diversified approach. You could invest into a wider range of funds, including non-UK. Depending on your attitude to risk, you could also consider global funds who are actively managed. This involves a fund manager proactively placing your capital into a range of asset classes and regions. Using their experience and expertise, the fund manager will make portfolio changes on a regular basis.
Are your investments heading in the right direction?
The UK’s future might be uncertain, so if you’ve not reviewed your portfolio for some time, now might be the ideal time to see if it’s still on track to achieve your goals.
Matthew Leach, Skipton’s Director of Financial Advice, explains: “If you’re not sure if your savings and investments are in the right place, you might not be on track to achieve your financial objectives. Equally, if your own circumstances have changed and you have different priorities, your savings and investments might no longer be as suited to your needs.
“The uncertainty of Brexit isn’t going to disappear for some time yet. But that doesn’t have to derail you from realising your ambitions. Hopefully, all is well with your savings and investments – but it might be worth meeting with your local Skipton financial adviser for a review.”
If you are willing to take a degree of risk with your money and are able to commit to a longer time-frame, you might consider taking financial advice.
A review with an expert financial adviser can identify where your money could work harder for you, help guide you through your options and offer tailored recommendations based on your own circumstances. To find out more, get in touch.
Our investment recommendations are likely to include stock market-linked investments. These aren’t like building society savings accounts, as your capital is at risk and you may get back less than you invest. The value of your investments and any income from them may fall as well as rise.
Retiresavvy is brought to you by Skipton Building Society. This article has been commissioned by retiresavvy and any opinions voiced are the author's own.