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Following the UK’s final departure from the EU on the 31st December 2020, the headlines have been remarkably quiet compared to the days leading up to the Brexit deal signing. Instead, the media’s attention has largely been on the national lockdowns since January 2021 and, more recently, the chaos surrounding the mob assault on the US Capitol Hill building. Yet investors will still be keen to know how “Brexit Britain” may fare in 2021, and whether this affects their portfolio strategy in the coming months. In this article, our financial planners offer some thoughts on this important question.
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The UK stock market: an overview of 2020
Many investors – including those with pensions – hold a portion of their portfolio in UK stocks (or “equities”). For instance, perhaps you are invested in a tracker fund which follows the FTSE 100 – the index comprising the 100 largest UK-based companies. This index, like many others in the developed world, plummeted in March 2020 as the realities of pandemic began to hit the stock markets – leading up to a 25% loss in the value of many pensions invested in them.
Slowly, these indices have been recovering over the past ten months. In the UK, for instance, the FTSE 100 stands at 6,798 on the 11th January 2021; up from its low-point of 4,993 on the 20th March 2020 (although not yet back to it’s 2020 high-point of 7,674). However, UK stocks remained volatile across 2020 as the UK re-imposed lockdown restrictions across the period, and as the country continued to negotiate a trade agreement with the EU to avoid a “no-deal” scenario on the 1st of January 2021.
Where things stand in January 2021
With the UK-EU relationship stabilised – temporarily at least – through its agreement of a formal Brexit deal, many UK investors are breathing more easily. Cross-border free trade in goods can continue for the foreseeable future; limiting the economic and business disruption which might have resulted from the imposition of tariffs. Yet questions still remain over how this relationship will pan out over the longer term. In particular, the trade deal does not cover financial services; one of the UK’s biggest exports, standing at £63.2bn in 2019. The wider services sector, which makes up 80% of the UK economy, is also not covered by the Brexit deal.
However, a positive of the deal is that British businesses now have more certainty – and this is good for investors. Indeed, some analysts believe that the UK, now free from EU regulations, is well-positioned to encourage greater investment through the introduction of “free ports” (low-tax jurisdictions to benefit specific UK regions) and to storm ahead in areas such as biotech and AI. One study by the Centre for Economic and Business Research (CEBR) forecasts that, if the UK plays its cards right, the country could grow its economy to 25% larger than France by 2025. If such forecasts largely prove true, then this will likely be welcome news for UK investors.
The pandemic still hangs over this picture, of course – with the country now locked down until at least mid-February in an attempt to curb COVID-19 and its new variant. Yet many experts are still upbeat about the UK economy in 2021, particularly as vaccines are rolled out to vulnerable groups. Some forecast that nearly half of the UK population – 32m people – should receive one of the jabs by spring 2021. The key question, naturally, is whether this will bring an end to the repeated lockdowns and allow a return to some semblance of normality, allowing the economy to recover. At present, there is no certain answer to where the vaccines will help achieve this – although the general mood from the scientific community seems to be optimistic.
The key takeaway
Ultimately, no financial adviser or expert can predict the future of a particular national economy or stock market. It’s unwise, therefore, to move disproportionate amounts of capital into the UK (or out of it) in anticipation of how its equity markets will perform. Remember the lesson from January 2020, when investors largely anticipated a good year for global equities. Yet nearly all failed to see the damage that would come from COVID-19 just two months later.
This lack of certainty should lead investors to remember two principles of successful investing. Firstly, invest for the long term; not for short term gains. Spend time in the markets rather than trying to time the markets. Secondly, be careful to diversify appropriately. Consult a professional financial adviser about how to split your portfolio across different markets, companies and asset types to mitigate unnecessary risk.
There are reasons to be optimistic about the UK in 2021. Yet the same held true at exactly this time last year, before the pandemic started spreading across our shores. Time will eventually tell how we fare in these uncharted waters. Yet it would likely be a mistake for investors to exclude the UK from their portfolio, given the potential many of its equities hold.
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