WHEN we asked our customers and readers what they would really like to know about Brexit, the vast majority responded that it would be great when it was finished, no matter what.
It’s natural to respond like that. But as in all financial crises, downturn, or even upturn, the winners take it all: If you can keep your head when all around you is losing theirs….
Taking an income from investments has been a tricky experience over the last decade. After the ‘financial crisis’, plummeting interest rates forced investors out of cash and into investments they may not otherwise have held.
A £100 invested in cash in 2009 would have been worth just £84 today given the eroding power of inflation during that period and record low rates. If you took the income from the account, your cash would have been decimated and probably unlikely to recover, especially as now you would need a rising income.
And so, paying attention to the prevailing conditions is definitely time well spent.
As per all the previous financial Brexit questions, I’m not going to gamble on the outcome of where Brexit will go.
All we can do with our investments is put out the correct stabilisers to ensure all sharp rolls in the boat are protected against. As I said last week, you won’t always have the fastest pace, and you won’t capsize.
Prevailing market conditions are an opportunity, and that’s why having the best manager is key, as they are able to move quickly and know the appropriate stabiliser to protect your portfolio. Different markets need different stabilisers.
This problem is escalated when trying to decide which inflation reporting to use. If you want to maintain buying power, beating inflation is everything.
If you look at UK price statistics versus the official government data, the differences are staggering. UK price statistics appear to be an almost contradictory graph to the official data. They use a scraping tool which analyses online prices each day from trusted sources to see what prices are actually being charged, rather than an historic data from an already untrusted methodology.
They have inflation at around 3 per cent now, higher than official government data. In October 2017, there was nearly 2 per cent difference between the two measurements.
Either way, investors looking for income will need to look at how they might protect against their income being eroded, as all roads from here appear inflationary according the Governor of The Bank of England.
Anything other than a soft or no Brexit would wreak havoc on Sterling’s value and, as a net importer, the UK’s imports become more expensive, and inflation soars.
To protect against this for example, our key investment manager took the step of purchasing the more expensive option of index linked bonds to protect against either an accidental or no deal Brexit. With the peculiar shenanigans in London, that has paid well as they were the best performing asset since June 2016.
Perhaps the biggest threat to the value of your income producing investments is that of a difficult relationship with the EU. They have cross border claims of around £1 trillion on the UK but the UK has almost half that on the EU. A difficult Brexit would undoubtedly have significant capital outflows from the UK market, hammering sterling and driving up inflation.
You can see why inflation linked bonds are a great balancer in that respect, as UK asset prices would also have significant mark down in price.
A further ‘risk’ depending on how you look at it, is that of a snap election given the current scenario, and the policy of a Labour government. If so, you might expect more government spending, which requires more gilts to be issued, and so gilt yields will rise.
Markets do not like uncertainty, and if you remember the first missed deadline was October last year, and as the current prime minister turns up time and again without her homework done, and asking for extra time, it weighs heavily on options available for your investment manager to produce positive income returns. Stabilisers it is.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a question on investments, call Darren McKeever on 028 6863 2692, email info@wwfp.net or visit www.wwfp.net
