The big news over the last month has of course been the referendum in which the UK electorate chose to exit the European Union. But how does this affect your money?
The short-term impact on UK shares has been muted, with the main FTSE100 index actually rising strongly following the Brexit vote. Many pension and ISA investors who have their money invested in shares and share-based funds have seen the value of their investments increase as a result.
The most significant impact has been to the value of the pound, which has fallen by about 10%. Whilst a fall in the value of the pound is bad news for those of us taking our summer holiday abroad, it is good news for companies who have significant foreign earnings. When they bring those foreign currency earnings back into the UK, they have a higher value when converted back into pounds.
Looking beneath the headlines
The rise in the FTSE100 also masks some sharp underlying changes to share prices in some sectors, with banks and house builders having sustained some steep falls in their share prices.
More widely, shares in smaller UK companies have not done so well. There are two main reasons for this. Firstly, these companies earn most of their money from the UK and the share prices have already moved closer to the levels you’d see in a slower economy or even a mild recession. Secondly, smaller companies have less foreign earnings meaning they don’t benefit from a weak pound in the same way as some larger companies do.
The FTSE250 index, which covers the 101st largest company to the 350th largest company, has fallen by about 10% since 23 June. Investors whose pension or ISA is invested in smaller companies, or funds that own smaller companies’ shares, will have therefore fared less well.
What might happen next?
Whether the UK economy actually slows down or enters recession remains to be seen. Markets hate uncertainty, act in advance of what they think might happen, and tend to assume the worst case scenario.
The government and the Bank of England have announced plans to stimulate the economy, which may stave off a slowdown but lead to even lower interest rates. People who hold their savings and investments in cash should prepare for this possibility.
As readers of Thinking Ahead will know, over most long-term periods in history, cash hasn’t performed as well as shares. And, the real value of cash savings can also be eaten away by inflation.
One investment mantra reinforced by events of the last few weeks it that it is good to spread your investments. When markets are turbulent, diversity often pays off, for example funds that invest in foreign shares will have benefited from the strength of foreign currencies relative to the pound. Bonds – that is loans to the government (gilts) or to companies (corporate bonds) – have also done well as investors seek out a safe haven.
Those who are invested in with-profits funds or outcome-oriented funds, which target certain returns whilst minimising volatility, are less likely to experience the strong up and down swings that pure equity investors have felt.
If you’d like to find out more about turbulent markets, and how you can aim to cope with them, try the following articles:
Watch this space
Regardless of where you are currently invested, don’t panic and act only after careful consideration. Also, keep reading Thinking Ahead! We’ll keep you up to date with future developments. Improving your understanding of money matters will also leave you better placed to take advantage of opportunities when they arise.