It is too early to quantify the full impact of the decision to leave the EU on the UK economy. Whilst the fall in the pound may enhance the competitiveness of UK businesses with regard to the export of goods and services, it is also true that there could be a rise in inflation caused by more costly imports. Additionally, global measures to fight inflation remain significant and the fall in the pound may not be all bad news.
According to Gary Potter, co-head of the F&C Multi-Manager Solutions team at BMO Global Asset Management, the fall in the pound also potentially increases the attractiveness of UK assets to foreign investors as they have suddenly become cheaper. The pound's fall also represents a significant additional stimulus to the UK economy, helping to offset the potentially negative impact of a more uncertain outlook in the near term. The fall in the pound has also provided a valuation uplift for many overseas investments held.
Potter goes on to say that another key area to be affected by Brexit has been UK investments, in particular small and mid-caps (companies with a value of £4bn down to £150m). Unlike the larger companies that dominate the FTSE 100 index who have a very substantial amount of earnings coming from overseas, and for whom the potential stimulus from the translation of overseas earnings into sterling gives an earnings uplift, the small- and medium-sized companies tend to have a greater domestic earnings bias. This means they will generally be more affected and more vulnerable to the uncertainties over the UK economy.
On the effect of Brexit on pensions, Nigel Green, deVere Group’s founder and CEO, says several key factors contribute to risks that may derail retirement plans. Firstly, gilt yields have reduced considerably since the Brexit vote and this has driven up transfer values. He explained that “This is good news for those wishing to take money out of the defined benefit scheme, but these larger pay-outs put extreme further pressure on the pension schemes themselves – many of which are already woefully underfunded. As more and more individuals seek to secure a transfer, the more likely it is that schemes will run into liquidity problems and could seek to freeze transfers altogether.”
Secondly, these falling gilt yields will further drive up pension deficits. He went on to say “It was widely reported last week that the UK’s pension funding hole has hit a record high of £935 billion. This is likely to grow and will soon reach a trillion. The weight of these deficits brings into question the very survival of many company pension schemes and in order to survive they will need to make drastic changes to the terms of employees’ pension schemes.”
Green concludes that Brexit has helped create “the worst of all worlds for pensions” and warns that savers must ensure they are properly diversified to mitigate the increasing threats to their retirement funds.
It falls within the role of Financial Advisers to ensure that their clients’ portfolios are adequately diversified, and some clients may only need reassurance in these uncertain times, but there is also the potential that people who are self-investing may now feel the need for professional financial advice.
Even the Brexit cloud has a silver lining for someone.