Wednesday 1 November 2017 8:00 am Fisher Investments UK

Control Brexit and nationalism concerns by investing globally

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As UK investors await the final Brexit plans, it may be time to consider the benefits of geographic diversification.

What a difference a year makes. Last June, as Brits voted to leave the EU, many viewed it as a time to shed UK assets. Sterling fell to multi-decade lows versus the dollar and other currencies. Shares and interest rates were volatile but stabilised quickly. However, that stabilisation did little to quell concerns over Britain potentially losing its standing on the world stage as a leader in trade, finance and politics. Those concerns linger today, as the EU / UK negotiations get underway. No one knows for sure how talks will wind up, and any pundit professing to know how the end deal will look is just guessing. In our view, Brexit isn’t necessarily bearish. Or bullish! But regardless, if you need growth, Brexit isn’t a call to avoid stocks. It is a reminder of the strengths brought by a global approach.

In the run up to the referendum, many speculated just the vote to leave would shock markets. That hasn’t materialised: In the year-plus since the vote, the UK economy has grown and UK shares have gained over 20 percent.[i] But fears didn’t ease—they shifted. Now many suggest there will be trouble down the road, once the break from the EU is complete and Britain loses its easy access to EU trading partners.

This suggests to us investor sentiment is overly dour, expecting an almost automatically bearish Brexit. Yet Brexit could be positive, negative or neutral—it is unclear now. If Brexit doesn’t prove disastrous, it should positively surprise investors—likely buying UK shares. As talks progress, opinions, leaks and proclamations will emerge, allowing the market to gradually discount the probable outcome.

Casting a Wider Net

But regardless of your view of how Brexit impacts UK markets, global investing has many advantages over a Britain-centric portfolio; the first is diversification. Spreading your portfolio over many geographies can help shield you from the political and economic risks of a single country. Last year’s Brexit vote was a prime example. Whilst UK shares have climbed 20 per cent since then, other developed markets outside Britain have risen more than 30 per cent over the same period.[ii]

Even if you aren’t concerned about Brexit, taking a global investing stance is still a good idea. The UK represents 3.5 per cent of global GDP, and UK shares represent 6.6 per cent of the MSCI World Index by market capitalisation.[iii] In other words, if you invest solely in the UK, you are essentially ignoring over 90 per cent of the global economy and thus missing out on opportunities outside the local economy—places like the Americas, the European continent, developed markets in Asia and Emerging Markets across the globe.

Sectors are important, too. Smaller nations tend to concentrate heavily in certain economic segments. For example, the UK has a rather large presence in the Financials, Energy and Materials sectors, but the Technology sector—which has been one of the world’s top sectors over the past several years—is only 2.7 per cent of total UK market cap.[iv] Meanwhile, a global commodities glut and ensuing crash in prices put tremendous pressure on the Energy and Materials sectors over the same period. A Britain-centric portfolio would have been underweight in the top performing sectors and overweight on some of the underperformers.

Taking Turns at the Top

Nations and regions tend to trade leadership over longer horizons. Since 1997, 14 different countries have been the top performer in a particular year. Over that span, the UK has been in the top five just once. The UK isn’t an inherently inferior investment—no country is—but concentrating your portfolio in any geographic segment can limit your exposure to big opportunities elsewhere.

In our view, Brexit isn’t necessarily bearish. True, Britain’s departure from the EU may raise the cost of doing business with the continent and its trade partners. Alternatively, a UK free from EU treaties and trade agreements will seek its own agreements to perhaps even greater net benefit. Whatever your outlook, a global exposure remains the best way to manage the political and economic risks of a single country whilst allowing you access to a world of opportunity.

Investing in equity markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world equity markets and international currency exchange rates.

Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited Headquarters: 2nd Floor, 6-10 Whitfield Street, London, W1T 2RE, United Kingdom. Fisher Investments Europe Limited’s parent company, Fisher Asset Management, LLC, trading under the name Fisher Investments, is established in the USA and regulated by the US Securities and Exchange Commission. Investment management services are provided by Fisher Investments.

This document constitutes the general views of Fisher Investments UK and Fisher Investments, and should not be regarded as personalised investment or tax advice or as a representation of their performance or that of their clients. No assurances are made that they will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts may be, as accurate as any contained herein.

[i] Source: FactSet, as of 18/7/2017. FTSE All-Share Index total return, 23/6/2016 – 17/7/2017.

[ii] Ibid. FTSE All Share Index total return and MSCI World Ex. UK Index return with net dividends, 23/6/2016 – 17/7/2017.

[iii] Source: World Bank and FactSet, as of 18/7/2017. UK GDP as a percentage of global GDP and MSCI UK share of MSCI World Index by market capitalisation.

[iv] Source: FactSet, as of 18/7/2017. MSCI UK IMI Index, Technology sector share of market capitalisation.