Press comment: How should investors respond to Brexit economic forecasts and can we rely on the numbers?
If you are covering the Brexit analysis produced by the UK government and Bank of England, please see the following commentary from Anthony Gillham, head of investments at Quilter Investors, the multi-asset investment business.
He argues that efforts to predict the long-term financial impact of Brexit are near impossible; urges government not to lose focus on other matters that stimulate growth; and examines how investors can think about the impact of Brexit on their portfolio:
“Attempts to forecast the economic impact of Brexit should be taken with a big pinch of salt. Even with good data and plenty of past experience to draw from, economic estimates are always difficult to forecast accurately. This was illustrated as recently as the Budget when Chancellor Phillip Hammond was handed a surprise windfall after the relatively simple matter of calculating domestic tax revenues was wildly misjudged.
“Brexit is an unprecedented geo-political shift, meaning there is little or no history to learn from. The truth is that today’s figures are estimates of an unknown and can only be taken as a rough guide to the future. It would be foolish to assume that Whitehall, the Bank of England or any other authority has a crystal ball with which to predict the long-term economic outcome. The fact that different forecasts in recent days have fluctuated so dramatically shows that nobody can truly predict the financial impact at this stage.
“I’m reminded of other significant events in history which experts predicted might humble a domestic economy. Those with a long enough memory will recall that the reunification of Germany caused no end of worry about the economic ramifications of such a marked overnight change in economic circumstances and trading abilities. In that case, two economies were brought closer together rather than drawn further apart, but it too led to predictions of economic doom. While the early 90s did prove disruptive, two decades on Germany now dominates the European economic landscape.
“The point here is not to compare one with the other – Brexit is without a direct peer in geo-political terms. But it does show that efforts to predict the financial and economic impact of major political transitions are difficult, if not impossible. We can be reasonably certain that a disorderly Brexit or ‘no deal’ scenario would cause a retraction in economic performance in the immediate term, but forecasting the long-term impact is extremely difficult.
“By the government’s own admission, the long-term trading relationship with the EU is still to be negotiated. That means any predictions are based on numerous assumptions that may prove to be false.
“Ultimately, creating a prosperous environment for business and the economy is a combination of multiple factors. One of those is access to overseas markets, and it would be deeply troubling for UK businesses if they were to be significantly disadvantaged through trade tariffs that are less favourable than those enjoyed by European peers. But it also dependent on a whole range of other factors including business taxation, the availability of skilled workers in the labour force, intellectual property rights, digital and physical infrastructure and a myriad of other issues. For the UK, it is critical that government focusses on addressing some of the challenges faced by businesses in these areas, as well as ensuring Brexit is handled as carefully as possible.
“For investors that are looking at the current situation with concern - and that appears to apply to many people, with sales of funds invested in UK assets suffering severe outflows – there are some important things to bear in mind.
“Firstly, domestic concerns about Brexit have little or no bearing on the global economy. If you’re invested in a globally diversified portfolio, then your portfolio is diversified for precisely this reason: to ensure you aren’t exposed to a single asset class or region.
“Secondly, where investors do hold UK assets, it is crucial to remember that the domestic economy is not to biggest determiner of the success of the FTSE. UK large cap companies derive a huge share of their revenues from a overseas operations, and many have in fact benefitted from Sterling weakness, which has boosted the export abilities, lowered overseas production costs and given them a currency-linked profit boost.
“Finally, with currency effects in mind, it is important to remember that the financial impacts of Brexit may not translate intuitively into investor portfolios in the manner they imagine. The fall in the value of the pound this year has actually benefitted UK investors holding foreign assets in Sterling denominated funds. Investors in US equities, for example, have seen their returns wiped out in dollar terms following the recent sell-off, but are up because of the strength of the dollar relative to the pound. Conversely, if the UK parliament approved the Brexit withdrawal agreement and the pound were to rally as a result, then those investors would see their portfolios take a hit as the currency conversion effect would see their foreign holdings worth less in Sterling terms.”
Notes to editors
Quilter Investors is part of Quilter plc. It provides multi-asset investment solutions designed for advised clients in the UK and internationally and manages 18.8bn on behalf of its investors (as at 30 September 2018).
Quilter plc is a leading wealth management business in the UK and internationally, helping to create prosperity for the generations of today and tomorrow.
Quilter plc oversees £118.1 billion in customer investments (as at 30 September 2018).
It has an adviser and customer offering spanning: financial advice; investment platforms; multi-asset investment solutions and discretionary fund management.
The business is comprised of two segments: Wealth Platforms and Advice and Wealth Management.
Wealth Platforms includes the Old Mutual Wealth UK Platform; Old Mutual International, including AAM Advisory in Singapore; and the Old Mutual Wealth Heritage life assurance business.
Advice and Wealth Management encompasses the financial planning network, Intrinsic; Quilter Private Client Advisers; discretionary fund management business, Quilter Cheviot; and Quilter Investors, the Multi-asset investment solutions business.
The Quilter plc businesses are being re-branded to Quilter over a period of approximately two years:
• The Multi-asset business is now Quilter Investors
• Intrinsic to Quilter Financial Planning
• The private client advisers business is now Quilter Private Client Advisers
• The UK Platform to Quilter Wealth Solutions
• The International business to Quilter International
• The Heritage life assurance business to Quilter Life Assurance
• Quilter Cheviot will retain its name
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