Brexit could wipe 8% off portfolios

27 Mar 2017

The type of Brexit deal Theresa May secures could be the difference between investment portfolios losing 8% of their value or gaining 3.5%, MSCI believes.

As the Prime Minister prepares to trigger Article 50 on Wednesday investors will be wondering how the different outcomes of the negotiations will affect their portfolios.

MSCI has done the hard work for investors by stress testing hypothetical scenarios of a rough Brexit, a smooth Brexit and a Brexit that is beneficial for the UK.

The portfolios tested comprised 60% equities with the remained invested in bonds.

If the two-year negotiation deadline passes without a trade deal, the pound will slump by 16% against the dollar and the euro, while credit spreads will widen and 10-year gilt yields will nudge 0.2% higher, according to MSCI.

This means that a globally diversified multi-asset portfolio could contract by 7.8%, while globally diversified equity portfolios could lose 11% of their value. Those with global fixed-income portfolios will fare better by losing only 2.8% of their value.

So it’s bad news all round for that particular scenario. But if May secures a trade deal with the EU the pound will remain steady, but UK equities could dive by 12%, while 10-year gilt yields climb 1.2%, the company’s data shows.

In this scenario a globally diversified multi-asset portfolio would lose only 1.6% of its value. Globally diversified equity portfolios would fall by 2.3%, while globally diversified fixed income portfolios remain largely flat by falling 0.5%.

The best scenario for the UK, according to MSCI, would be if Europe elects several anti-EU parties in the next 18 months. This could make the UK a safe haven due to its bilateral trade relations with countries including the US and China.

The pound will jump 16% against the dollar, inflation and growth will pick up, while equities will gain 4.2%. The yield on 10-year government debt will move 0.1% higher.

A diversified, global, multi-asset-class portfolio could gain as much as 3.5% of its value if this happens, while a globally diversified fixed income portfolio could lose 2.2% of its value.

Fidelity International’s annual analyst survey reported that leaders of the world’s largest companies were bullish on the year ahead. The improving price of oil and rising demand will help drive corporate earnings, pushing investment levels higher and will see corporate fundamentals improve.

Fidelity does say that Brexit, along with inflation, could see companies revise their plans to invest in the UK. This means that investors need to follow the negotiations closely. There may not be a bigger one-off impact on portfolios than the outcome of these talks.

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