Investing in a post-Brexit world

Whether it's a deal or no deal, these are the smart moves to make for investing wisely.

It has been impossible to escape the looming shadow of Brexit over the past few months. We've had the controversial shutting down of Parliament, revelations of risks surrounding a no-deal Brexit, and senior political figures being sacked or resigning.

The sorry saga has created an environment of uncertainty that has held back the UK stock market, according to Adrian Lowcock, head of personal investing at Willis Owen.

"It has put off international investors who have dropped their allocation to the UK to record low levels, while the pound has borne the brunt of the fallout," he says.

The situation isn't any clearer for UK investors who are debating if now is the right time to invest and whether they should have exposure to their home market.

The fact is that any UK company could be affected by Brexit, although international giants may be less impacted because their business operations are more global.

However, the situation is rather more complicated for smaller firms, suggests Mr Lowcock.

"They are a mixed bag because some will be more domestically focused," he says.

"However, there are plenty in this space with self-help attitudes and entrepreneurial spirits."

Of course, the best investment strategy, post-Brexit, will depend on the outcome of the negotiations.

A good outcome is likely to see the pound rally, explains Graham Spooner, investment research analyst at The Share Centre.

"Investors may look to move out of FTSE 100 stocks with a bias for international earnings and look for UK-focused companies or funds that could get a short-term boost," he says.

He suggests Mercantile (LSE:MRC) could be worth considering in this scenario, as it invests in a diversified portfolio of UK medium and smaller companies.

"Investors looking for a share to benefit from this scenario might look to Lloyds Banking Group (LSE:LLOY), which has close to 100% revenue exposure to the UK economy," he adds.

Further uncertainty is unlikely to go down well, points out Patrick Connolly, a chartered financial planner at Chase de Vere. "Markets hate uncertainty," he says. "It would be bad news for domestic-focused stocks, which means most mid- and small-cap companies."

It could also be perceived negatively for UK commercial property, although the likelihood of sterling weakening could benefit large companies with overseas earnings.

"A weaker sterling is also good news for UK investors who hold overseas assets as these will be worth more when converted into sterling," he adds.

Connolly suggests the best investment approach while there is a lack of clarity is to diversify, because nobody can consistently predict which asset classes or sectors will outperform.

"It is important that investors don't try to be too clever," he says.

"They should, therefore, invest in UK shares alongside overseas shares."

In addition, he argues it's important to stay relaxed during this period and even consider investing more on the back of stock market uncertainty.

"Despite the volatility, many companies continue to perform well, make consistent profits and have large amount of cash on their balance sheets," he says.

Investing regular premiums - as opposed to lump sums - is another tried-and-tested way to invest in difficult periods, as well as rebalancing portfolios regularly.

"By selling investments that have done well in favour of those that have done badly you are effectively selling at the top of the market and buying at the bottom," he adds.

"This is the holy grail of investing and something that very few investors consistently achieve."

According to financial advisor Martin Bamford, managing director of Informed Choice, there is the risk of overplaying the importance of Brexit.

In fact, he suggests it's something of an investment sideshow when set against the backdrop of a slowing global economy and rising trade tensions between the US and China.

"I've no doubt there will be some short-term disruption to the UK economy and potentially to UK markets, but we see this sort of short-term volatility at regular intervals," he says.

However, the Brexit wrangling does serve as a useful reminder of how important it is to consider the fundamentals of investing.

This means reviewing your attitude toward – and capacity for – investment risk, as well as ensuring you have sufficient liquid assets to get you through any short-term market events.

"Portfolios should be well diversified across assets and markets, so the impact of a single event doesn't derail your entire wealth," he adds.

Ones to watch

Scenario one: If Parliament reaches a deal

The first scenario is Parliament agreeing some form of Brexit deal. This would be perceived as positive and potentially lead to a rally in domestic, small- and mid-cap UK stocks.

Increased confidence in the UK economy – and fewer short-term concerns about businesses moving overseas – would also be positive for UK commercial property.

However, sterling is likely to strengthen; this would be bad news for many FTSE-100 companies, which earn a significant proportion of their revenue from overseas.

Patrick Connolly, a chartered financial planner at Chase de Vere, believes the Liontrust UK Smaller Companies could do well in this environment.

"This is a high-risk fund – however, it's one that works really well for those taking a long-term view," he says.

"It has achieved an impressive track record."

Scenario two: If there is a no-deal Brexit

While the threat of a no-deal Brexit has receded since a general election was called, there is still a possibility of an 'accidental' no deal, were the newly-elected government unable to pass a deal and the EU to refuse another extension. 

In this case, the HSBC FTSE 100 Index fund could be worth considering, according to Mr Connolly.

This fund provides broad exposure to the largest companies on the UK stock market by tracking the performance of the FTSE 100 Index.

The largest holdings in the fund will always be the companies with the highest market capitalisations, such as BP (LSE:BP.).

"As a passive fund, it is very cheap, with an ongoing charges figure of 0.18%," Mr Connolly adds.

"The largest holdings will always be those with the highest market capitalisations."

Liontrust UK Smaller Companies

Value of £100 invested in the fund over five years

*The £100 was invested in January 2014. Source Moneywise.co.uk

HSBC Index Tracker Investment Funds - FTSE 100 Index Fund (retail accumulation & income)

Value of £100 invested in the fund over five years

*The £100 was invested in January 2014. Source Moneywise.co.uk

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.