Investment Diversification?

Brexit! I think we are all a little tired of the topic. It has affected most aspects of our lives, and investment is just one of many examples, with some negative sentiment towards UK equities (shares) over the last period. Indeed, a recent journalist request for comment echoed this sentiment, although we were a little more positive in our outlook. However, concerns for future global growth have been in focus for some time.

As a note, we are not seeing a significant shift away from UK equity investment and I think that to do so may be an overreaction. Investors in FTSE100 companies may benefit from falls in GBP Sterling, as a significant proportion of profits for FTSE100 companies are made in other currencies. In addition, as an example, investors more generally may also benefit from the end of the trade wars/tariffs between the US and China. There are no guarantees that this will happen, but (as we have noted in previous articles on our webpage) with a US election in November 2020, pressure may be on to make this occur sooner rather than later. We believe that most markets have factored in some form of Brexit effect and some might fairly note that UK equity values may have an under-valuation and offer a buying opportunity.

But what of other indices, such as the FTSE250? The FTSE 250 has greater UK focus than the FTSE100 and by its nature features smaller companies. We believe that these have greater exposure to Sterling variations and, of course, the U.K. economy and its Brexit headwinds. In principle, it is likely to be the FTSE250 which may see the greatest volatility over Brexit, dependent on the way GBP Sterling reacts. The next period of time is an unknown for us all and we do expect volatility, which may be more pronounced in the FTSE 250 market.

Chapters Financial has collated an example performance graph of some of the main investment sectors over the last 10 years as an indicator of performance of varying investment sectors over the period:


Graph Key:

  • A FTSE 100
  • B FTSE 250
  • C Sterling Corporate Bond
  • D UK Commercial Property
  • E Gilt & Fixed Interest
  • F Commodities
  • G Global Equities

(Source: Trustnet Portfolio Tools/ October 2019)

The performance graph above indicates the performance of a selection of sectors over the past 10 years, but past performance is not a guarantee of future performance

Long term strategy

Most of the investments we maintain are long term investments, using asset allocations to meet clients' attitudes to and tolerance for investment risk. We see a longer-term strategy as being over five years. It is important that these are reviewed regularly. There is a longer-term concern that the long running equity bull market, which is tired, has a little left to run, before being exhausted (not guaranteed). This is focusing attention across the globe, with a few key indicators to note a recession on the horizon. However, this we believe is a year plus away, and this may see longer term strategies change to more defensive positions over the coming period, in part away from global and UK equities to other less correlated funds.

Reducing investment risk?

Noting the above, what are the alternatives to reduce investment risk, and perhaps correlation? If a move to lower risk is required or advocated, we could look at a mixture of corporate and government bonds (global and UK). Some may argue that the correlation between bonds and equities has reduced significantly in recent times. With a bull bond market now in its 36th year, some are questioning that if it can continue this long, when will it really stop?

Alternatives?

For further diversification, investment in commercial property could also work, although we have been reducing positions in this sector, particularly in the UK, of late due to concerns over potential future down-valuations or moratoriums. At the highest end of the risk scale in our opinion, we find commodities and of course gold!

But be careful, all that glitters…

There are no guarantees within this blog, and these are only our opinions. No individual advice is provided during the course of this blog. Past performance is not a guarantee of future performance.

Keith Churchouse FPFS

Director

CFP Chartered FCSI

Chartered Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899