Spread risk to deal with a post-Brexit Britain

QASINCE the EU referendum the financial news has been dominated by the sharp drop in the pound. While this is obviously bad news for anyone going on a foreign holiday, what might sterling’s fall mean for my investments? Given how much the FTSE 100 has jumped since the Brexit vote, so far the impact seems to have been positive, but will it last? THE past few weeks have been dramatic ones for the UK’s stock market and the pound. On October 11, the FTSE 100 of leading UK companies reached its highest recorded level of 7,128. Meanwhile, the pound has continued to slide, a process that began after the June EU referendum.

The two, of course, are con- nected. Many UK shares derive some of their business revenues from overseas. These revenues are now worth more in pounds. Investors have been buying UK shares in expectation of the boost to earnings that many companies will receive from sterling weakness. This has given a stock market boost to UK companies such as once-struggling oil and mining groups.

The pound’s weakness has created losers as well. A lower pound means higher costs for companies that buy their goods overseas and sell them to UK consumers. It also reflects expectations that the UK economy will weaken. Housebuilders, banks and high street retailers, exposed to a slowing UK economy and higher import costs, have struggled as the pound has fallen.

For investors, these are uncertain times. We still don’t know much about the future in a post-Brexit world. However, investors should be prepared for further sharp movements in financial markets as the process of exiting the EU continues.

This reinforces the wisdom of holding an internationally diversified portfolio, invested across a range of countries and industries, which will spread risk and minimise the impact of a UK-focused downturn. A focus on quality, global companies should help investors to weather market volatility over the medium term and minimise the impact of a UK-focused downturn.