23 May 2016, 10:57am
personal finance:
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  • Brexit or not – opportunities and hazards?

    In about a month’s time the UK will have a referendum on leaving the EU. I’m not going to spend much time on the merits or not, because the result will be whatever it is. I will observe, however, that you get to know something about your destination if you look at your fellow passengers on the bus. And the passengers on bus Brexit seems to be folk I don’t want to ride with – people who haven’t realised that the sun set on the British Empire a very long time ago and a few random chancers and headbangers from the Tory party. The one thing I do hope and pray for is once the result is known, whatever it may be, we don’t get to do this again for another 40 years 1. I suspect by then it will be a moot point for different reasons.

    The quality of discourse about which way to vote is terrible, largely because so much is inherently unknowable. Osborne stands up and says house prices may fall by 18% if Leave wins. To which I ask myself exactly WTF this is regarded as a bad thing in the first place? Is it really so terrible that some of our young people might actually get to be able to buy a house and some borrow-to-letters get to know the deep joys of negative equity, and secondly, what is Osborne’s confidence interval on this stat? How certain is he of the assumptions behind this ridiculously precise-to-two-figures assertion – the range is probably between -50% and + 25% and he may as well say God knows. The same charge can be levelled against the other side – deciding to leave is a complex and chaotic process that depends on many variables that are inherently unknowable, open to fate and the whims of other people and countries. I’m not clever enough to have an informed opinion, and that probably goes for most 😉 So this is not about the merits of either course of action, and headbangers of either side aren’t welcome in the comments.

    Financial hazards and opportunities

    The choice is between the status quo and something different, and it’s probably fair to say that financial markets in the short term don’t really like ‘something different’ in general. That’s not specifically to decry the putative upsides the Leave camp are making – if they are right these upsides will show up over the five, ten, twenty year timescales. Certainly if one is convinced by the Leave economic case the course of action is to buy UK equities into the post-June whirlwind and sit tight for a few years – a mix of VUKE and some UK small-cap index fund would cover most bases.

    I’m not personally that convinced. There is also the slow run on the pound which is already 25% down from the financial crisis, as a chart of IMF special drawing rights (a basket of foreign currencies to try and average out individual country forex swings) per UK pound shows

    1605-gbpxdr

    Which has no doubt made my ISA look better than perhaps it really is because there is now a fair amount of foreign stuff in it – indeed it is making my Charles Stanley ISA, which is purely a index fund of Dev world ex UK look better than it really is. And since that is over 50% US and I think the US is shockingly overvalued it’s not what I want to do. But sometimes in investing you have to invest in stuff you don’t believe in. The US isn’t a bad place to have a lump in if I am expecting turmoil in the UK and perhaps also Europe more widely. Obviously there’s the potential turmoil of the follically challenged trickster becoming POTUS in November 2, but let’s tackle the nearest fire first, eh. Oh and let’s not forget the Greek crisis and other tribulations. One of these days that damn Euro is going to go titsup…

    Now a run on the pound could be countered in many ways. Buying foreign stuff, indeed buying forex or spreadbetting it. Buying gold isn’t a bad way to go, although I already have a bit too much gold from late last year. But I’m not after optimizing my long term asset allocation. I am looking for a defensive position until after the referendum.

    There are two outcomes I can see. One is that remain wins. My asset allocation is broadly where I want it to be at this stage, and in five years time the referendum will have been a hiccup in the general trend. The only opportunities in this eventuality is if the uncertainly before the referendum makes prices cheaper. I bought some VUKE a couple of times earlier this year, this holding is currently 7% up. Should the turmoil of Brexit send that below par, or close, I am tempted to buy more of that sort of thing. Although a Brexit win will probably hit those firms, they are big fish and 70% of earnings come from overseas they can probably come good over time.

    The other is of course that Leave wins, in which case gold will have been the right way to go because the pound is likely to come under severe pressure for a while. I’m still okay with the FTSE100/VUKE which I think will come good in the end. So, undecisive bastard that I am, I have chosen to do all three. I have switched the cash in my TD ISA with gold ETFs, I have brought forward my monthly purchases of the L&G Dev xUK index fund for the next three months and if FTSE100 starts to tank in the runup to the referendum I have a full year’s worth of ISA allowance to put into Charles Stanley, although I’m not going to use all of it on this. In the end I can’t protect myself against the downside, but I may as well try and lose a little less in the worst case, and if possible profit from the volatility in the best case.

    The FT has a piece on Brexit finance ramifications and a poll tracker as does the Economist. But in the end William Goldman has the edge on all the pundits  – “Nobody knows anything”. He was talking about movies, but it applies just as much to Brexit and its outcomes or not.

    Notes:

    1. in which case it’s highly unlikely to be my problem either way
    2. I don’t necessarily agree with all of the Spectator’s conclusion, but it’s a fun description and one by Americans rather than a slightly more balanced way of saying the same by us effete Europeans, which seems right in something that is essentially an American choice
     
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