How Brexit will affect your money
Canny - or simply downright lucky - investors might spot opportunities from the economic storm Brexit is expected to create
Published 27/11/2016 | 02:30
Irish investors are in for a choppy ride over the next two years as Brexit unfolds - and for even longer should Britain sink into recession. Britain's shock vote to leave the eurozone has triggered uncertainty in stock markets since last June - and sent sterling into free fall.
Investors in British commercial property funds and British government bonds have been among the worst hit. Many of those who hold shares in companies with exposure to the British economy have also seen the value of their investments dive since the Brexit vote.
British property funds will continue to lose money over the next two years as Brexit plays out, according to Brian O'Reilly, head of global investment strategy with Davy. Brexit has triggered concerns that British property prices could fall as companies look to relocate from Britain to other locations in Europe. British-based firms have already been eyeing up Dublin for property space as part of a contingency plan if they lose their European passporting rights. This has made British commercial property funds vulnerable.
"The initial reaction post-Brexit was that a lot of the British property funds wrote down their asset values," said O'Reilly. "We are beginning to see a sharp slowdown in the British construction sector. There's also a lot of supply [of property] still coming on board in Britain."
Such oversupply could spell trouble for investors in British commercial property if demand for property there wanes.
Many British property funds are invested in office blocks in the City of London - blocks which may become vacant if investment banks or other major firms decamp to Dublin or other European capitals.
Some investment experts are not as alarmed, however. Despite the vulnerability of British property funds, investors with money in British property should sit tight and see how Brexit unfolds, according to Peter Brown, founder of Baggot Investment Partners. "If you have sterling property, hold onto it," said Brown. Brown, who is also a director with the Institute of Investing and Financial Trading (IIFT), believes the fall in the value of British property funds since Brexit is a "knee-jerk reaction".
"I'm still in the camp that Brexit negotiations will be pragmatic in the end and positive for the British economy," said Brown.
Of course, should Brown be wrong, and Brexit prove disastrous for the British economy, a lot more money could be lost on British property.
Sterling has had a tough few months since the Brexit vote. Between June and September of this year, sterling had its worst run since 1984. Many of the investment funds which have performed poorly since Brexit have had exposure to sterling. However, the weak sterling has proved to be a double-edged sword for investors in British shares.
The FTSE 100 - an index made up of the largest 100 companies listed on the London Stock Exchange - did well following the Brexit vote and it largely continues to do so. The main reason for this is that the majority of companies in the FTSE 100 earn their profits overseas, so a weaker sterling helps them compete for business overseas.
"Every time sterling falls, the FTSE 100 rallies as these companies translate their profits back at better exchange rates," said O'Reilly.
On the other hand, the FTSE 250 - which includes smaller and more domestic-focused British companies - fell steeply in the days after the Brexit vote. That index, which has had a bumpy ride with the weak sterling, is thought to be a better gauge of the concerns about the British economy than the FTSE 100 is.
So should you own the shares of a British-based multinational, you may make money as Brexit pushes on - if sterling falls further. However, should you own shares in small or mid-sized British companies who largely sell to British consumers, you could lose a lot of money, particularly if Britain sinks into recession.
A British recession and investors
There are fears that Brexit could push Britain into recession. This would see many investors with exposure to the British economy lose money - especially if the recession is a prolonged one.
"UK economic data has been better than we expected since Brexit," said O'Reilly. "We think that's temporary."
In his Autumn Statement last Wednesday, the British Chancellor Philip Hammond said that Britain is expected to have the fastest-growing major advanced economy in the world in 2016. However, he revealed that growth forecasts for next year had been downgraded considerably - as a result of the uncertainty created by the Brexit vote and the higher inflation triggered by the weak sterling.
So 2017 could well be the year when the British economy really starts to get knocked by Brexit.
"The massive devaluation of sterling since Brexit has helped improve the competitiveness of many British companies - but we think this advantage is likely to come to an end as the next two years unfold," said O'Reilly. "We think we've seen most of the adjustment in sterling - as a consequence, we are seeing an uptake in inflation. Our view is that Britain will have to pursue a hard Brexit - and that this will push it into recession. We'll see a big push on inflation in the UK, which will slow down the consumer."
High inflation is bad for investors in British bonds, particularly long-dated bonds. As the election of Donald Trump as President of the United States is expected to trigger higher inflation there, US government and other bonds will also be in the firing line. Many bond investors will lose money if inflation rises. Those saving into a pension need to be careful their exposure to bonds is not too high - and to get independent advice on how vulnerable the particular bonds in their portfolio are. Not all bonds are the same.
Also vulnerable are the holders of shares which typically do well when the British consumer is confident about their finances and happy to spend their money - such as the shares of British car manufacturers, hotel and travel companies, clothes retailers, and the manufacturers of British luxury goods.
The fallout from Brexit will hit Ireland's economy for another five years, the Economic and Social Research Institute warned last September. The decline in the value of sterling relative to the euro since June has already hurt Irish exporters. It has also triggered a spike in cross-border shopping by consumers from the Republic. There has been a surge in the numbers importing cars from Britain and the North as Irish car buyers seek bargains on the back of the weak sterling.
The euro has gained ground on the sterling since Brexit, regularly trading above the 85p sterling mark.
"That 85p seems to be the tipping point where Irish goods are no longer competitive compared to British ones," said O'Reilly. "Our own view from speaking to [Irish] businesses is that everyone materially underestimated the impact of Brexit. A lot of companies have seen their order book slow down since. We think Brexit will have a more material impact on the Irish economy than people thought. That's across every industry. The most impacted industry is the agricultural sector - especially non-listed food companies."
Brexit could be bad news for investors in Irish hotel chains or ferries because a floundering sterling makes it more expensive for British tourists to visit Ireland - which could trigger a downturn in the numbers visiting from Britain.
The shares of the Irish Ferries operator, ICG, for example have fallen sharply since Brexit. Ryanair has said that it will be cutting flights in and out of Britain and focusing instead on increasing its presence in EU airports - because of the uncertainty created by Brexit.
There is no denying that Brexit will have far-reaching implications for Irish investors - it will be the canny ones, however, who will be able to spot the opportunities from the economic storm it is expected to create.
Investors in Irish REITs such as Irish Residential Properties REIT, Hibernia REIT and Green REIT could do well from Brexit- if a flight of British firms and employees to Dublin pushes up demand for property in the capital.
So, too, could holders of shares in CRH and Kingspan - if there is increased infrastructure spending under Brexit.
The weak sterling could create opportunities for long-term investors to snap up quality British property cheaply. Some experts are predicting that the pound sterling could reach parity with the euro as soon as next year.
"For long-term investors, we certainly wouldn't rule out the pound sterling moving towards parity with the euro," said O'Reilly. "If sterling moves towards parity with the euro, it will open up a lot of opportunities for euro-based investors. It will become cheaper to invest in good quality UK assets, such as British property for example."
Should you decide to invest in British property however, you must be able to leave your money there for between five and 10 years, according to O'Reilly. It would also be important to invest in quality British property - that is, well-located and sought-after properties near good public transport links rather than those which would struggle to secure tenants or buyers.
There is so much uncertainty around Brexit that it will take time to see how it will play out for investors. Brexit may well turn into an unexpected money-spinner for some.
"Long term, I think sterling will come out of this well - so if you're in sterling, sit tight," said Brown. "We'll have a bit of rock and roll with sterling over the next two-and-a-half years through the Brexit negotiations. I think the sterling exchange rate will find some stability and that the outlook for the euro is much worse than sterling. There are a number of general elections coming up in Europe - including in Italy. If Italy goes the populist route, the euro may suffer - so sterling investors may well be in the right place."
Like so many of the political shocks to emerge in recent months, only time will tell how Brexit plays out.
Sunday Indo Business