One of the most fascinating things about Brexit is the impact it will have on the world if it should come to pass. The United Kingdom may be no more than a collection of small islands, but it is greater than its diminutive size suggests: a superpower; a global powerhouse; and one of the most influential economies in the world.
For those invested in the financial markets, this is not news. Traders, commentators, experts, brokers like ETX Capital… all know what a pivotal role the country plays on the world stage. It is one of the key players in Europe’s power games, and its performance in the global theatre has the potential to impact all of our lives, investor and ordinary citizen alike.
It’s little surprise, then, that the eyes of the world in recent weeks have been fixed on this under-sized nation. Wherever you stand or sit whilst you peruse this article – New York, Barcelona, Moscow – you’ll have read the same stream of prose detailing the fallout from Brexit. Every one of us waits with bated breath to see whether the UK stays or leaves, and the impact that it will have upon us.
And in a sense, it’s all academic. These endless reams of information have a limited utility, for no one can say who is wrong and who is right. The only answers lie in the event itself, and even more so in its aftermath.
Yet there are a few things that we can say with certainty. The markets will react, one way or another. There will be movement, one way or another. Sterling will rise or fall, stock markets will soar or stumble. Reaction is inevitable, but the rest is simply guesswork.
This doesn’t mean you can afford to sit out the storm passively. Trading the markets is always a form of speculation, and it’s about working out the most likely direction in which the bullets fired will ricochet. You can do this still; what’s more, you can protect yourself. Tumult is nothing new, after all, and many are well versed in how to weather its ravages.
But where to start?
Understanding the Impact of Weaker Sterling
If a vote to leave wins the day, then one consequence seems inevitable: the value of sterling will plummet. We have already seen the pound decline sharply, a trend exacerbated by every poll indicating a swing in favour of Brexit, and this seems unlikely to reverse if investors’ fears of a separation from the European Union come to pass.
Yet every intelligent trader knows that in movement lies opportunity, and this is what you must seize upon. Although you may want to sell off the pound, remember before you despair that this decline will have a marked positive impact in other areas.
On that note, an important point to consider is that British companies which are heavily reliant on exports may be a wise investment for traders from every nation. Lower sterling will make these ventures far more competitive when compared with their foreign counterparts, and thus a sweet proposition for your portfolio.
Choosing to Diversify
As we mentioned above, British export companies may be a savvy bet for those looking to protect themselves against variations in sterling. So too, as every intelligent trader knows, is diversification.
Diversification is, quite simply, the best way to protect oneself against the ravages of market events, even events as momentous as a potential Brexit. The way to do it in this instance is simple: make sure that you are well diversified internationally, and that you’re not over-exposed to UK domestic assets.
To break this down a little, small and mid-cap shares are a risk that you don’t want to run. Due to their greater exposure to the domestic economy, they will be impacted to a far greater degree than multi-nationals, and this makes them a poor choice for traders.
Those stocks with an overly large reliance on the domestic economy should also be discounted as investments, and instead clever investors are looking at British stocks with high non-UK earnings, such as pharmaceuticals and telecoms.
The most important piece of advice, however, is simply this: make sure that your portfolio is stocked with interests from as many countries as possible. The potential for Brexit’s fallout to be felt around the world is extensive, and by covering your bases with a wide array of assets, you armour yourself against the more vicious ravages of downward-spiralling stock markets.
Investing in Safe Havens
Last but not least, tactical traders are turning to safe havens to protect them. Government bonds, the Japanese yen, and gold are all obvious options, and each of them will be well equipped to protect you.
We’ll look at gold as a case in point. Hungarian-born investor, philanthropist, and billionaire George Soros has dabbled in stocks, bonds, and currencies during his long career, but 2016 has seen him turn to this traditional safe haven to protect his $20 billion fortune.
The reasons for this are simple: gold has been valued by mankind since time immemorial. Famed for its beauty and desirability, it rarely experiences negative fluctuations in value, and even during the worst of times, its worth remains high. This is not to say that you should sink the entirety of your funds into it, but if you’re looking for an asset to balance your portfolio, then it is one for you to consider.
The truth is that none of us know how this is going to end. Not one person amongst us can say with absolute certainty whether the United Kingdom will fly from its lofty perch into an independent future, or whether it will stay with slightly ruffled feathers, realising that it prefers its exalted place to the risks of freedom from another master. Nor can anyone say what staying or going will really mean for the country or the rest of the world. The trick is to guard against any eventuality as well as you can, knowing that even if you fall, you’ve created a comfortable cushion to catch you. Follow this advice, and you might just find that you’ve managed it.