The answer to Brexit

“Give me strength…” (Ted Hastings, Line of duty)

While the twists and turns of Jed Mercurio’s police procedural continue to grip the nation, the appeal of Brexit’s increasingly tortured denouement seems to be waning. Many seem to have been bludgeoned into a state of glazed indifference. As the chances of a softer, more economically palatable (eventual) exit from the EU increase, we take a look at the latest developments and three lessons for investors from the story so far.

The latest…trick or treat?

The cross-party talks have so far borne no fruit. Nonetheless, the EU has offered to push the date of the UK's departure back to the end of October. The UK could still leave on the first of any month up to Halloween, if it manages to ratify the withdrawal agreement.

Lessons from the front

1.      Populism and investing

Global electorates have undeniably tilted towards populist causes in the last couple of years. From the US to Hungary, there seems to be a clear desire from parts of the population to recreate the world in an earlier image. If we assume that there are economic consequences from this political turn, the problem for investors becomes how to predict populism.

There does seem to be some relationship between economic hardship and the rise of political extremes, but not one that is sufficiently robust on which to base an investment strategy. Similarly, many have pointed to trends in inequality within the UK and US a harbinger of Brexit and President Trump respectively. However, US income inequality had already been elevated for some time before the its electorate succumbed to the allure of the immoderate (Figure 1).

Translating a prediction of a surge in support for one populist cause or another into an investment recommendation is less easy than it sounds. Those who argued that this new trend towards nativism and protectionism should immediately mean dialled-back investment risk in portfolios have been punished by a world economy that thought otherwise.

2.      Diversification is not just about insulation

Diversification now comes with an army of increasingly tired truisms – it’s the only ‘free lunch’ etc. Many seem to see diversification as solely an expression of caution; mediocrity for the meek and indecisive. There is some truth in this of course. However, the more complete reality is that diversifying your assets across regions and industries is not only a bulwark against inefficient governance in one particular company or another, it is the most efficient way to harvest the many and various opportunities the wider world throws up – and to avoid the potential embarrassment borne of miscalculated hubris. Accessing this wider world of opportunity has become progressively easier and more inexpensive in the last few decades in particular.

3.      No edge

The most important question for investors who are trying to do more than get passive access to the world’s capital markets is to determine where they might have an edge. This search for a competitive advantage over all of the other investors out there should start with the assumption that the competition are competent and highly motivated on average. There are few easy wins out there – new information is more often than not quickly and effectively assimilated into asset prices.

Regarding Brexit specifically, in the context of the above, we feel we have no edge over the crowd. We still think that more obvious tactical opportunities lie elsewhere. For example, we sense that the world’s government bonds are pricing a bleaker outlook for growth and inflation than we see as likely. We are positioned accordingly.

Investment Conclusion

Set Brexit, with all its domestic ramifications, alongside the ongoing fourth industrial revolution and you have all the incentive you need to think about a long term investment in a globally diversified, multi-asset portfolio. The fruits of humankind’s innovation are there for all to harvest. 

Learn about Barclays Wealth Management, the affluent and high net worth service provider for Barclays UK.

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*This article is for information purposes only. It is not intended as an investment advice.