Effect of No deal Brexit & Trump Trade war on UK markets

[funduffer]

Not sure if this is the right board for this, and I don't want to start a Leave v Remain debate here (leave that for Polite Conversations Board!) but....

1. Probability of No Deal Brexit seems to be rising....

2. Trump trade war seems to be escalating.....

If a No Deal becomes reality, or highly probable, how will markets react? Will it be like the referendum with a step down in the pound's value which has persisted, and where, after a brief blip, the FTSE pressed on upwards? Or do we think it could be different?

Trump has it in for world trade. So if the response to 1 is invest overseas, which areas would you think are likely to be least affected by the trade war for investment?

Is it time to even contemplate re-thinking my entire investment strategy (90% HYP + international income IT's + world tracker, and about 10% bond funds plus some cash) ?

Reason for asking - sitting on some cash to invest, but nervous of the near future, so sitting on hands at the moment.

FD

[TUK020]

Not sure if this is the right board for this, and I don't want to start a Leave v Remain debate here (leave that for Polite Conversations Board!) but....

1. Probability of No Deal Brexit seems to be rising....

2. Trump trade war seems to be escalating.....

If a No Deal becomes reality, or highly probable, how will markets react? Will it be like the referendum with a step down in the pound's value which has persisted, and where, after a brief blip, the FTSE pressed on upwards? Or do we think it could be different?

Trump has it in for world trade. So if the response to 1 is invest overseas, which areas would you think are likely to be least affected by the trade war for investment?

Is it time to even contemplate re-thinking my entire investment strategy (90% HYP + international income IT's + world tracker, and about 10% bond funds plus some cash) ?

Reason for asking - sitting on some cash to invest, but nervous of the near future, so sitting on hands at the moment.

FD

FD
good question to ask oneself.
Particularly as there is always a risk that the fallout from 1. will lead to 3. Corbyn government.
A very significant % of world GDP sits in a free trade area of over 500m people, mostly very developed economies. A European IT beckons....
I have seen mention several times on these pages of JETI, any others I should look at?
tuk020

[johnhemming]

It is possible to have a no deal by mistake because of the time it would take to get something agreed by the EU.

[Goderich]

I was about to post the same question. A key question is what happens to the pound. If it goes down then non-UK investments or international UK companies will be better. I am thinking about non-UK trackers like Vanguard Life Strategy. Does this seem reasonable? Does anyone have any bright ideas?

[richfool]

(Over the last couple of months I sold TMPL (Temple Bar), NAIT and ASCI.)

I've topped up MYI (Murray International) because of its overseas, Asian and EM exposure, and its low exposure to the US and UK., and because of its defensive manager.

Earlier this year, I added JETI to my existing holding of HEFT (Henderson European Focus).

I also topped up JPGI (JP Morgan Global Grth & Inc) because of it's global exposure and low UK exposure; although it does have about 49% US exposure and some technology holdings.

....And I am currently retaining dividends in cash.

[Charlottesquare]

I was about to post the same question. A key question is what happens to the pound. If it goes down then non-UK investments or international UK companies will be better. I am thinking about non-UK trackers like Vanguard Life Strategy. Does this seem reasonable? Does anyone have any bright ideas?

Imho you really do not have to go totally that far, the large FTSE 100 companies earning overseas mainly in Dollars etc ought to be reasonably okay, in fact as per June 2016 they will likely rise with falling Sterling. I have already adjusted some of my holdings but have, as in June 2016, kept hold of Shell and I still have Unilever.

I do think the euro may also suffer so not sure re European ITs, I hold European Assets Trust and may need to reconsider it.

Others that are still held but may be sold fairly soon (or at least exposure reduced) are City of London, Edinburgh Investment Trust, Invesco Perpetual Smaller Cos, Merchants Trust and Standard Life Property.

I am relatively comfortable with Aberdeen Asian, Aberdeen Latin America, Black Rock Frontiers, Fidelity China, Henderson Far East Income, JP Morgan Emerging, JP Morgan Indian,Middlefield Canadian,Murray international and Utilico emerging Markets.

Whilst it is not only USA exposed I have recently taken a Berkshire Hathaway position to replace my previously held US ITs like NAIT.

The catch is re say EAT what bounce might one expect if there is a deal, what mark down has it already suffered re hard brexit fear(I am down 11.61% since purchase which is currently just under two years dividends.)?

[funduffer]

A lot of discussion on overseas IT’s, so here are my thoughts:

Europe: looks solid, but may suffer from No Deal Brexit a bit

USA: Markets at record highs, and trade war reality may set in and trigger a major correction

China: trade war bound to have negative effect

Emerging Markets: Rising US rates may cause them some difficulties as dollars go back home.

Japan/Far East: perhaps least affected?

UK: not the place to be in event of No Deal.

My thoughts currently - sit on cash or hedge my bets with Murray International IT.

FD

[Gengulphus]

My thoughts currently - sit on cash or hedge my bets with Murray International IT.

Sitting on cash seems a pretty high-risk strategy to me at present, with big movements likely in one direction or the other depending on the Brexit outcome. I would only do it if I wanted to make a substantial bet on what that outcome will be - one can bet in either direction by choosing which currency the cash is in.

Gengulphus

[swill453]

Sitting on cash seems a pretty high-risk strategy to me at present, with big movements likely in one direction or the other depending on the Brexit outcome. I would only do it if I wanted to make a substantial bet on what that outcome will be - one can bet in either direction by choosing which currency the cash is in.

I disagree on the "high-risk" bit. I hold pounds, and I spend pounds, so having a bank account stuffed with pounds feels quite safe. Of course I have to accept that it's not earning as much in interest as the official inflation rate, but I don't really consider that a "risk".

Scott.

[Charlottesquare]

Sitting on cash seems a pretty high-risk strategy to me at present, with big movements likely in one direction or the other depending on the Brexit outcome. I would only do it if I wanted to make a substantial bet on what that outcome will be - one can bet in either direction by choosing which currency the cash is in.

I disagree on the "high-risk" bit. I hold pounds, and I spend pounds, so having a bank account stuffed with pounds feels quite safe. Of course I have to accept that it's not earning as much in interest as the official inflation rate, but I don't really consider that a "risk".

Scott.

It is safe only insofar as it will subsequently be deployed buying UK things that will not be impacted by currency movement changing their price, otherwise it is as exposed as many other asset classes.

Re savings reducing in value it depends on your timeline, currently cash is only safeish for very short periods, the current say 1.2% pa differential with inflation will, with compounding, erode savings steadily and certainly- money in the bank is a certain loss at the moment, the key is will it lose less than A N Other investment decision.

The other issue is, in the event of a bad brexit downturn will we see import led price inflation with a weakness in the economy that will not permit interest rate rises, in effect further rounds of QE. A cash holding in such a scenario will erode even faster (Though the cash may be able to be deployed acquiring UK oriented business entities whose share price, even in sterling, may be distressed by such an outcome.)

There are, imho, no safe areas without a crystal ball, so maybe the strong dividend companies are the way to go here, especially those spread over multiple markets and exposed to myriad economies- diversification.

[Itsallaguess]

My thoughts currently - sit on cash or hedge my bets with Murray International IT.

Sitting on cash seems a pretty high-risk strategy to me at present, with big movements likely in one direction or the other depending on the Brexit outcome. I would only do it if I wanted to make a substantial bet on what that outcome will be - one can bet in either direction by choosing which currency the cash is in.

Are both of those quotes discussing 'sitting on cash' in a 100% way?

If they are, then I'd tend to agree with Gengulphus that it would be a high-risk approach, but if 'sitting on cash' really means 'sitting on some, and perhaps even a material amout of cash' whilst still maintaining a substantial amount of mostly-main-market investments, couldn't such a position be seen as a valid hedge against what might be the current Brexit outcomes?

Cheers,

Itsallaguess

[Gengulphus]

With regard to swill453's comment, just to say that I haven't ignored it, but I agree with Charlottesquare's reply and have nothing to add to it.

My thoughts currently - sit on cash or hedge my bets with Murray International IT.

Sitting on cash seems a pretty high-risk strategy to me at present, with big movements likely in one direction or the other depending on the Brexit outcome. I would only do it if I wanted to make a substantial bet on what that outcome will be - one can bet in either direction by choosing which currency the cash is in.

Are both of those quotes discussing 'sitting on cash' in a 100% way?

If they are, then I'd tend to agree with Gengulphus that it would be a high-risk approach, but if 'sitting on cash' really means 'sitting on some, and perhaps even a material amout of cash' whilst still maintaining a substantial amount of mostly-main-market investments, couldn't such a position be seen as a valid hedge against what might be the current Brexit outcomes?

Certainly it could be a hedge - but what exactly is it hedging, and is it the most effective hedge? You say "mostly-main-market investments", but those vary a great deal with regard to their exposure to Brexit and to government change in the UK. And at least as regards Brexit and its possible effects on exchange rates, companies like HSBC, Unilever and BHP Billiton with high levels of overseas operations and those like United Utilities, Barratt Developments and Greene King with high levels of UK-based operations are likely to be affected in opposite directions. So if I wanted to hedge that risk, I would first analyse my portfolio from the point of view of the balance between underlying overseas and UK-based operations.

Then if I reckoned that there was too much net risk in one direction or the other and I wanted to hedge it, I would then want to choose what I hedged it with suitably. It might be cash - but which currency the cash was in would depend on which direction the net risk was in, and there would be plenty of other choices besides cash. Among them is simply rebalancing the portfolio in the direction of more companies with high levels of whichever underlying type of operations I felt it was short of.

In short, I think it needs a good deal more thought and analysis than the phrase 'sitting on cash' is likely to suggest.

Gengulphus

[Itsallaguess]

Are both of those quotes discussing 'sitting on cash' in a 100% way?

If they are, then I'd tend to agree with Gengulphus that it would be a high-risk approach, but if 'sitting on cash' really means 'sitting on some, and perhaps even a material amout of cash' whilst still maintaining a substantial amount of mostly-main-market investments, couldn't such a position be seen as a valid hedge against what might be the current Brexit outcomes?

Certainly it could be a hedge - but what exactly is it hedging, and is it the most effective hedge? You say "mostly-main-market investments", but those vary a great deal with regard to their exposure to Brexit and to government change in the UK. And at least as regards Brexit and its possible effects on exchange rates, companies like HSBC, Unilever and BHP Billiton with high levels of overseas operations and those like United Utilities, Barratt Developments and Greene King with high levels of UK-based operations are likely to be affected in opposite directions. So if I wanted to hedge that risk, I would first analyse my portfolio from the point of view of the balance between underlying overseas and UK-based operations.

Then if I reckoned that there was too much net risk in one direction or the other and I wanted to hedge it, I would then want to choose what I hedged it with suitably. It might be cash - but which currency the cash was in would depend on which direction the net risk was in, and there would be plenty of other choices besides cash. Among them is simply rebalancing the portfolio in the direction of more companies with high levels of whichever underlying type of operations I felt it was short of.

In short, I think it needs a good deal more thought and analysis than the phrase 'sitting on cash' is likely to suggest.

I can only speak regarding my own investments, but in recent times where we've seen the pound go down 'with regards to Brexit' (or as confident as we can be that this is the case...), then I've seen a rise in my investment portfolio....

That's not to say that I've done any real calculations as to what effects such a negative movement is having on any potential cash holding, compared to the other positive effect on my investments, but it's correlated enough during recent times around the 'Brexit-effect' that I'm confident that the cash holding is a hedge of sorts, and of my current active investments. If it's only really affecting some of those investments, then it wouldn't really change anything for me personally.

I think we can sometimes try to analyse these things too much, or convince ourselves that we need to, and sometimes end up not acting on what our gut is telling us. I've been in that position before, and behaved like a rabbit in headlights - that was a good lesson learnt for me, and whilst it seemed expensive at the time, subsequent years has allowed me to see it as a short, sharp shock that I definitely needed to learn from.

I'm happy that the current 15% cash-or-cash-equivalents position that I've currently got is acting as enough of a hedge regarding the Brexit decision that I'm both happy to have it, and happy to continue to do so. If it's not as precise as it could be, then that's a story for another day for me...

I should say that as someone who holds a lot of sway towards being 'fully comfortable' (or as near as we can hope to get...) with my investment position at any given time, the reality for me is that such a hedge doesn't actually have to be anywhere near any sort of accuracy. I just need to see such opposite correlation actually happening for me to be happy that I've made the right decision to carry the cash position. If that situation could be improved by a percentage move one way or another, that's much less important to me than the fact that I've got something in place that's working to some degree - I'm really quite happy with that...

This may of course not be relevant to many investors, who much prefer more accuracy, but given that this doesn't apply to me, I thought I best mention it so my personal position on this subject is clear.

Cheers,

Itsallaguess

[Gengulphus]

I can only speak regarding my own investments, but in recent times where we've seen the pound go down 'with regards to Brexit' (or as confident as we can be that this is the case...), then I've seen a rise in my investment portfolio....

That's not to say that I've done any real calculations as to what effects such a negative movement is having on any potential cash holding, compared to the other positive effect on my investments, but it's correlated enough during recent times around the 'Brexit-effect' that I'm confident that the cash holding is a hedge of sorts, and of my current active investments. If it's only really affecting some of those investments, then it wouldn't really change anything for me personally.

Well, I think there is also a 'relief rally' effect involved in that, at least in the most obvious example, namely the referendum outcome. And I strongly suspect that we'll see the same once the outcome of the EU withdrawal agreement negotiations is known, however they turn out - it will certainly give both investors and company managements a clearer basis on which to make their plans.

But yes, I've seen the same in my own investments. And I haven't done a precise determination of the extent to which they're UK-based vs internationally-based, just some fairly quick looks through them to get a general impression. That impression has been fairly clear: there's been quite a strong tendency for the mostly-internationally-based companies to have done better than the mostly-UK-based ones. For instance, from eyeballing a chart, of the six companies I mentioned in my last post, the three mostly-internationally-based ones (HSBC, Unilever and BHP Billiton) are up about 50%, 30% and 90% respectively since just before the referendum, while the three mostly-UK-based ones (United Utilities, Barratt Developments and Greene King) have roughly broken even, dropped 30% and dropped 45% respectively. That's not conclusive evidence, of course, and there are clearly other factors involved for all of their performances, but equally it's not all the companies I took a look at. The big picture does look clear to me, and what it suggests to me is that sterling cash would hedge mostly-internationally-based shares, and foreign cash would hedge mostly-UK-based shares, but each type of cash would 'anti-hedge' the other type of share.

What it also suggests to me is that each of mostly-UK-based and mostly-internationally-based shares would hedge the other, and that if my suspicion about a relief rally turns out to be the case, would be a better choice of hedge than cash.

This may of course not be relevant to many investors, who much prefer more accuracy, but given that this doesn't apply to me, I thought I best mention it so my personal position on this subject is clear.

Also to be clear, the "if I reckoned that there was too much net risk in one direction or the other and I wanted to hedge it" in my previous post was an important proviso. I'm reasonably tolerant of risk myself and the fairly cursory looks through my existing portfolio mentioned above was enough to make me pretty confident there wasn't too much net risk for me in either direction, so I haven't gone for any greater accuracy. Other people here probably have different levels of risk tolerance, so basically all I can do is indicate the general approach I would suggest taking to the question and leave people to decide for themselves how much risk they consider too much and how accurately they need to try to assess it.

Gengulphus

[Itsallaguess]

The big picture does look clear to me, and what it suggests to me is that sterling cash would hedge mostly-internationally-based shares, and foreign cash would hedge mostly-UK-based shares, but each type of cash would 'anti-hedge' the other type of share.

What it also suggests to me is that each of mostly-UK-based and mostly-internationally-based shares would hedge the other, and that if my suspicion about a relief rally turns out to be the case, would be a better choice of hedge than cash.

That suggestion would make a lot of sense, and given that my current situation consists of a mix of mostly-international-based investments, mostly-UK-based investments, and cash, then I'm quite happy for the current mix of those components to hedge themselves about a bit over short to medium term, even if that hedging situation could be more finely tuned if I were to give it more attention.

Cheers,

Itsallaguess

[funduffer]

My thoughts currently - sit on cash or hedge my bets with Murray International IT.

Sitting on cash seems a pretty high-risk strategy to me at present, with big movements likely in one direction or the other depending on the Brexit outcome. I would only do it if I wanted to make a substantial bet on what that outcome will be - one can bet in either direction by choosing which currency the cash is in.

Are both of those quotes discussing 'sitting on cash' in a 100% way?

If they are, then I'd tend to agree with Gengulphus that it would be a high-risk approach, but if 'sitting on cash' really means 'sitting on some, and perhaps even a material amout of cash' whilst still maintaining a substantial amount of mostly-main-market investments, couldn't such a position be seen as a valid hedge against what might be the current Brexit outcomes?

Cheers,

Itsallaguess

In this case I mean sitting on some cash that I want to invest. Not a lot, but a worthwhile investable amount. I have no intention of sitting on it for very long - just until the immediate Brexit “crisis” passes and some clarity returns. My main dilemma is do I invest now in overseas based stocks, and protect myself from a drop in the pound, or hang on to cash and bag bargains if the FTSE takes fright.

If Brexit all passes smoothly, then either course of action will have done much harm over a few months duration.

FD