Even with a more decisive parliament, PM Boris Johnson still has a busy year ahead if he is to achieve his intended 2020 Brexit. Albeit much lower than before the election, there remains uncertainty surrounding the health of the UK economy.
Although the action of leaving is more certain, market professionals, from economists to investment managers, do not have enough information yet to confirm beyond doubt what impact Brexit will have on the UK economy.
With that in mind, a key question from investors is whether the UK’s largest stock index, the FTSE 100, should still be part of their investment plans. The answer in our opinion is still a resounding yes, and here’s why.
The FTSE 100 is priced low
If you are looking for an attractive long-term investment, the FTSE 100 could be a good option. The stock market is currently at a low price, meaning it could offer a good return over the next 5 to 10 years. Importantly in our opinion, this is because all the negative effects Brexit may have, have already been priced in.
How can we tell? Using financial analysis tools we measure different components of shares like earnings growth, cash flow and dividend payments. Looking at these metrics, we can determine what would be considered cheap, fair value, and expensive when purchasing the FTSE 100, and in this instance, it looks cheap, especially compared to other markets, such as the S&P500 in the US and MSCI Europe.
Brexit uncertainty could be a good thing for investors
Legendary investors like Warren Buffet are renowned for investing at moments when others don’t- why? Because when there’s greater risk, the opportunity for rewards is also much greater. An event like Brexit introduces greater uncertainty to the economic outlook, which may create an opportunity to buy the FTSE 100 at a much lower price than it would be without the Brexit risk.
What about the impact of the pound on the FTSE 100?
The media love to talk about the pound’s falling value in a negative way, but the effect of a weakening pound on the FTSE 100 has been largely positive, and that’s because the FTSE 100 is local by name, but global by nature. Most analysts agree that 70% to 75% of the earnings of top UK companies are generated internationally. With such a large proportion of overseas earnings, when the pound falls in value, earnings and assets owned overseas typically rise in value because they are in different currencies, like USD, which will have increased against the pound. When the Brexit referendum results were announced, the pound fell dramatically, but the FTSE 100 went up, demonstrating the benefit of a weak pound to the companies in the UK’s largest index.
Sentiment towards the UK will likely affect the FTSE 100 performance
Although it is global by nature, that doesn’t remove the risk of a sell off in the FTSE 100 due to negative sentiment towards the UK. Emotions can drive movements in the market more than facts, especially in the short term [1]. Should there be increased concern that the UK will be harmed by Brexit, there’s a chance this will be reflected in the FTSE 100. Typically, reactions like this are painful in the short term but for long term investors it could prove a valuable opportunity to buy shares at a discounted price.
The FTSE 100 is a diversified group of companies
As well as being a geographically diverse group of companies, the UK stock market also covers a wide group of sectors. With lots of companies working in different industries, some are likely to be largely unaffected by any Brexit disruption, some may even benefit from it.
Do you think Brexit is likely to be worse than the global financial crisis in 2008?
The global financial crisis sent a shockwave through the global economy and arguably had the biggest impact on stock markets worldwide.
However, if you held a FTSE 100 index fund, and reinvested all dividends received back into the fund, your returns would be 70%+ from the pre-crisis peak, and some 200% from 2009 through to present day2. So, even in the short-term when specific events cause upset, if you’re a long-term investor and comfortable owning shares, the FTSE 100 could still form part of your investment plan.
So, is the UK stock market still a good place to invest?
Our answer is yes, as long as you diversify your investment plan. At Wealthify, we invest in some UK companies, but we also make sure to spread risk across investments types and regions which could be less exposed to Brexit. Our Plans can contain up to 80% non-UK investments, coming from many global regions such as Japan and America. Also, we tend to favour larger UK companies when building your Plans. These companies are likely to be more Brexit-resilient, as they tend to have more global operations.
If you have any questions, please don’t hesitate to get in touch.
2: Data from Bloomberg
Past performance isn’t a reliable indicator of future results.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
