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An antidote to Brexit jitters: diversify by investing globally

1 November 2017

3:00 AM

1 November 2017

3:00 AM

Over a year after the UK voted to leave the European Union, UK stocks are humming along, and the economy continues to grow. For investors, there is one obvious lesson: don’t overrate any widely discussed event’s potential market impact, and instead take popular narratives with a grain of salt. But there is also a secondary takeaway: to limit your exposure to any country-specific risk – whether or not it’s overhyped – diversify globally.

Diversification is a straightforward investing concept. It is about recognising two things: risk is everywhere, and spreading your money around helps limit exposure to any single thing – be it a country, region, industry, company, trend and so on. By mixing and matching a variety of assets, you construct a portfolio that is likely to be less volatile than a more concentrated one.

Brexit effects: too early to tell

If you believe some pundits, disaster is just around the corner for the UK. Some contend trouble will come once Brexit is official and the UK leaves the EU single market.

We disagree. It is still too early to know what the Brexit terms will entail, so it is impossible to say whether the impact will be good, bad or neutral for the British economy. Brexit’s ultimate impact will likely hinge on trade and the City of London’s ability to remain a global financial hub – neither will be clear until a final agreement is sealed. In our view, however, UK equities should perform well over the foreseeable future, in part because minority governments – the current UK political makeup – tend to bring political gridlock, which generally reduces legislative risk. The UK economy also appears stronger than many perceive, with recent services and manufacturing surveys pointing higher while retail sales improve. Reality doesn’t appear to match the popular perception of a UK strangled by inflation.

Diversify anyway

Yet one key investing rule is: always remember you could be wrong. Whether or not the UK sails through Brexit in fine form, we believe placing all your assets in any one country magnifies risks and limits opportunities. One of the biggest upsides to global diversification is insulating yourself against the inherent economic and political risks in any particular country. Every country is different, and global investing lets you capitalise on strong trends in some nations while limiting your exposure to risks elsewhere.

Keep in mind that Britain is but one small piece of the global investing pie. The UK accounts for just 3.5pc of the world economy and 6.6pc of developed-world equity markets, based on market value. [i] Thus, investing solely in UK shares not only exposes you to the risks inherent in any tightly concentrated portfolio, but it also limits your ability to invest where the opportunities may lie.

America, continental Europe and developed Asia are growing nicely, boosting corporate earnings across those markets. Owning foreign stocks also gives you broader sector exposure than you’d get in any single, small country. While the UK is the third-largest country in the MSCI World Index by market cap, it is still limited on a sector basis. It has little technology exposure, for instance. To get meaningful access to what has been one of the top sectors in 2017, you must own American and Asian stocks. Political drivers also vary internationally. Falling political uncertainty has helped continental European stocks this year – another opportunity you gain exposure to by investing globally.

No country outperforms all the time. While individual country returns zig and zag, a global portfolio helps smooth out volatility. When you invest globally, it doesn’t much matter whether the UK leads or lags over the foreseeable future.

Investing in equity markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world equity markets and international currency exchange rates.


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This document constitutes the general views of Fisher Investments UK and Fisher Investments, and should not be regarded as personalised investment or tax advice or as a representation of their performance or that of their clients. No assurances are made that they will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts may be, as accurate as any contained herein. Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited Headquarters: 2nd Floor, 6-10 Whitfield Street, London, W1T 2RE, United Kingdom. Fisher Investments Europe Limited’s parent company, Fisher Asset Management, LLC, trading under the name Fisher Investments, is established in the USA and regulated by the US Securities and Exchange Commission. Investment management services are provided by Fisher Investments.

 
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[i] Source: World Bank and FactSet, as of 18/07/2017. UK GDP as a percentage of global GDP and MSCI UK share of MSCI World Index by market capitalisation.

For more information, visit fisherinvestments.com/en-gb.


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