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Brexit

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Thanks to David Cameron’s pledge to hold a referendum on a Brexit, the news agenda looks set to be dominated by talk about whether the UK will end up inside or outside the European Union – and the potential ramifications of either result. It is hard not to get caught up in the forecasting and supposition in the media from “experts” and commentators on this hot topic.

Given the bombardment of information and conflicting views and whatever your personal stance on “In or Out” it is natural to believe one of the losers from such a campaign is likely to be your investment portfolio. Stock markets do not like uncertainty, and with business leaders already highlighting the potential risks of an exit from the EU, sterling has weakened and the risk to UK bonds and equities seems high. The ejection of the pound from the European Exchange Rate Mechanism in 1992 had a short-term impact on UK domestic fixed income, and this may happen again. For equity investors the impact may be less obvious, as approximately 60% of FTSE All share company earnings come from overseas[1]. Any weakness in sterling would therefore compensate for share price weakness. On conclusion of this referendum uncertainty will be removed and this is likely to offer an improved environment for financial assets in the UK.

“……Financial assets in the UK” is a key point – in a global investment context Brexit or otherwise is likely to be just another touch point in world news. Diversification by geography and asset class aims to reduce such specific risks and it is one way to help insulate investment portfolios from these events.

[1] According to Royal London Asset Management

Henry Findlater


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