As some of you may know, Boris Johnson recently became the Prime Minister of the United Kingdom. He assumed the role after the previous Prime Minister, Theresa May, resigned over her failure to resolve the Brexit issue. Boris Johnson faces an October 31st deadline to work out a deal with the European Union. He seems unlikely do be able to do so.
Prior to the nation voting on Brexit, economists warned that a ‘hard’ Brexit could trigger a recession in the United Kingdom. While this will primarily impact the citizens of the U.K., many U.S. investors are concerned. The Bank of England recently issued a report that said the U.K. economy could contract by as much as 8% with the value of the pound declining up to 25%. This would likely hurt global markets.
While we can only wait and see what the impact will be, I have been taking precautions with your portfolios even since the 2017 vote to leave the E.U. took place. First, investment in the U.K. has been limited as the Brexit deadline approaches. Exposure to U.K. equities in your portfolios currently range between 2.5% and 4.5%. I will reevaluate market conditions at the end of this quarter to see if further reductions are warranted.
Another strategy that I have been using for European developed market investments has been to employ a currency hedging strategy. This is different than most international investments. Most funds are typically linked to local currencies. With an unhedged strategy, you could have growth in the underlying investment while seeing losses due to the local currency declining in value. The currency hedging strategy pegs the value of an investment to the U.S. dollar to minimize this risk. With the pound continuing to decline in value, this strategy can help mitigate this problem.
As always, there is no way to predict where the markets will go in the future. The best long-term investment strategy is focus on maintaining a diversified strategy that fits with your risk tolerance. While economists are concerned about how Brexit will impact the economy, there is no guarantee their fears will come true. Sitting on the sidelines could mean that we risk missing out on growth opportunities. With that being said, the moves that I have made over the last couple of years should help if worse comes to worst.