A month on from Brexit, FT Money has been swamped with requests for information from readers who want to know what the referendum vote means for their money.
Many indicators are in flux. Early economic data has signalled a slowdown, the UK-centric FTSE 250 has swung like a pendulum, the pound hit its lowest level against the dollar in 31 years and estate agents are reporting a marked drop in activity. The Bank of England has signalled strongly that interest rates will be cut in August, while business and consumer confidence has dropped.
But most experts are urging investors to be cautious, particularly if they have a long-term financial plan put together by an adviser with tax, inheritance and asset allocation in mind.
“When a big event like Brexit happens, investors instinctively feel like they should react, like they should do something to avoid becoming roadkill,” wrote Patrick Chovanec, the chief strategist at US wealth manager Silvercrest Asset Management in a note to clients. “In fact, investors should only change their strategy if what happened has changed their outlook.”
There is no denying, however, that the Brexit vote could have big ramifications for our pensions, properties, financial commitments in currencies other than sterling, and even our ability to trade classic cars.
FT Money has compiled a selection of questions from readers and asked FT specialists to respond with the help of financial experts. So if the referendum has left you worried about any aspect of your financial life, here are some views you can use.
1 To buy or not to buy
I am buying a house and worry about going ahead with the economic instability that Brexit has been forecast to bring. Should I cut my losses and wait a while?
With little hard data so far on the economic fallout of Brexit, your decision will be guided largely by your instincts on what a downturn would mean for your prospects, as well as your reasons for buying, writes James Pickford, FT Money deputy editor.
No one will be able to tell you now whether your job would disappear in a recession, but if you feel it is at risk, then simply for peace of mind financial advisers might steer you away from taking on a large mortgage until the picture is clearer. The first significant data are expected to trickle in from August.
If you feel you have to buy a home and intend to live in it for many years — and can demonstrably afford to pay the mortgage even if interest rates shoot up in future — then any short-term fluctuations in pricing are likely to be less material to you. Mortgages have never been cheaper, with fixed-term rates at record lows.
If you are buying a property as an investment or do not plan to stay long, you will need to take a much closer look at values in your area — whether they are at historic highs and how they compare with average wages, for instance — to get a sense of how vulnerable they might be to a fall in prices.
Bear in mind that doing nothing may not be without its own consequences: if, say, you are a tenant in an area where rents are rising fast or rental properties are short on the ground, you may find more of your income absorbed by the roof over your head.
Jeremy Duncombe, director at broker Legal & General Mortgage Club, says the best course of action would be to consult a financial adviser. But he made clear the financial mood was very different from that which prevailed after the crisis of 2008, when lending froze.
“We have not seen the negative reaction that was predicted as a result of Brexit, and at the moment, it is still very much business as usual in the mortgage market . . . . lenders are still very keen to lend and in some cases have dropped longer term fixed rates, making now a prime time to take out a mortgage.”
2 London property prices
How will Brexit affect property prices in prime central London?
The high-end London property market has been in decline since 2014, writes Judith Evans, property correspondent. Prime central London prices fell 8 per cent between that peak and the time of the referendum, according to Savills, the estate agent.
After the vote, the early signs are that the choice to leave the EU has prompted vendors to adjust their expectations downwards. Cuts to asking prices in central London surged by 163 per cent in the 12 days after the vote, compared with the same period beforehand, according to LonRes, a data provider.
Four weeks after the vote, the Bank of England says it has revised downward “significantly” its house price forecasts, while analysts at Bank of America Merrill Lynch — among the more pessimistic — project a 10 per cent drop across the UK in the next year.
The future of the prime central London market will depend on two key questions: how low sellers will need to bring prices before buyers feel insulated from future price falls; and to what extent those choosing not to buy a new home in London because of Brexit will be outweighed by speculative investors, particularly those feeling currency gains as sterling drops.
Anthony Payne, LonRes managing director, believes cuts to asking prices will eventually help to bring buyers back into the market. But few analysts expect Brexit to provide a price boost, especially given the uncertainty around the capital’s future as a financial centre.
According to Savills’ predictions, the market in central London will “remain price sensitive” in the short to medium term, partly due to increases in stamp duty over the past two years.
3 Is my pension safe?
I have been working in the EU for a long time and have built up a pension. What effect will Britain exiting have on my ability to draw on or transfer my pension from another EU country?
Like many other aspects of your personal finances, arrangements for cross-border pensions — both private and state — in a post-Brexit world will depend on the final deal struck with the EU, writes Josephine Cumbo, pensions correspondent.
But some legal experts do not anticipate a vast change for private pensions, which are largely unaffected by EU law.
Rosalind Connor, a partner with Arc, the specialist pension lawyers, says UK citizens who have built up private pensions in EU zones, can leave their pension pot behind, to pay out when they retire, if they return to the UK.
“At the moment, EU law means they cannot be taxed differently on the pension because they are overseas, but of course that could change post-Brexit,” she notes.
She adds that if anyone is concerned about a EU-based pension pot, they could investigate transferring it to a UK registered pension.
In contrast, future entitlements to state pension following Brexit face far greater uncertainty, Ms Connor says.
Currently, if someone from the UK works in another EU country and pays local taxes towards social security, they will get social security benefits, including contributions towards pensions, as if they were a citizen of that country. “That won’t necessarily apply any more on Brexit,” she says.
4 End of the road?
I buy and sell classic cars as investments, and the people I trade with are all over the EU. Because of Brexit, we do not know what trade tariffs will be between the UK and European countries. Cars have had a great run, but should I stop investing in them now?
Investments in classic cars have driven serious growth over the past three years, fuelled by high levels of demand for iconic models, writes Peter Campbell, motor industry correspondent.
The HAGI index, which tracks the value of mid to high-end classic vehicles and forms part of the Knight Frank Wealth Index, rose by double digits in the first six months of 2013, 2014 and 2015.
But worries over Brexit will not take the gloss off the allure of vintage vehicles, according to dealers. “Since 24 June, everyone we have talked to says it is business as usual,” says Dietrich Hatlapa at Historic Automobile Group International, who compiles the HAGI index.
“Some UK dealers actually see it as brilliant, because our stock appears very cheap because of the decline of sterling. This is a global market.” US buyers of British cars “couldn’t believe their luck” at the deals available, he added.
The index has grown by 1.8 per cent in the six months to June — considerably lower than the impressive rates notched up in past years. This is not due to concerns over access to the single marker, but instead an increasing number of restored vehicles becoming available in response to the high demand of the recent past.
“There’s now a huge amount of supply,” says Mr Hatlapa.
5 The weak pound
I live and work in the UK, but have $200,000 of US student loan debt to repay over the next 20 years. With the pound as weak as it is, the cost of my monthly repayment has just gone up by 20 per cent. What should I do with my finances to mitigate this problem? It has wiped out my discretionary income, despite the fact I earn a very good wage.
In your situation, financial advisers and planners say there is no magic bullet, writes Naomi Rovnick, digital and communities editor of FT Money.
Many report having clients in a similar situation to you, who have financial commitments in dollars, perhaps because their children are studying in the US, or that they are paying monthly support to ex-spouses or elderly parents who live across the Atlantic.
For people who are able to plan for having financial liabilities in dollars, the best thing they can do is “dollar cost averaging”, says Simon Davis, wealth management director at Charles Stanley. This involves drip feeding sterling into dollars each month, to build up a stack of the US currency in a manner that insulates them from wild swings in the exchange rate.
In the case of someone who has debt in dollars and not many spare pounds, a reduction in discretionary income is sadly inevitable, Mr Davis says. He recommends that you examine your expenditure closely, to work out where savings can be made. Perhaps you buy an expensive sandwich each lunchtime, when you could easily bring bread, cheese and tomatoes to the office from home. You might like going to nightclubs or buying clothes, but these must be sacrificed for a while.
If you have expensive credit card debt, you should transfer it to a card with an introductory rate of zero per cent interest. Many of these deals currently last 40 months, and could get even longer, as the Bank of England base rate stays ultra-low. Many such cards come with fees and balance transfers, however, of up to 4 per cent of the outstanding debt.
6 Sterling hits savings
Should I switch my sterling savings into dollars? Or euros? How easy is this to do and how should I do it? Transfer all of my money at once, or a drip-feed strategy?
This is a tricky one, writes Katie Martin, head of FastFT. My first question to you is: do you have a time machine? If so, nip back to June 22 and flip it all into dollars.
If not, it is worth being aware that sterling has almost certainly not done falling yet. It has, of course, tanked against the dollar since the referendum result. One pound bought you $1.50 shortly after 10pm on June 23. It buys just $1.32 at the time of writing, hovering around a 31-year low.
Most professional currency watchers think it has further to fall, perhaps as low as $1.10, more likely to the mid-to-high $1.20s, when the hard data on the scale of the blow to the UK economy start trickling in. A rally is not inconceivable, but it does seem unlikely and would probably be much smaller than the potential decline. Similar weakness probably lies ahead against the euro, although to a lesser degree, given that Brexit does pose some risks to eurozone economic growth.
If you are uncomfortable with that, there are loads of ways to switch into dollars, but be canny. If you ask your usual bank, you may not get a great rate. That means the currency would have to fall quite a bit more until you are “in the money”. But if you do, you may avoid transfer fees and hassle to move the funds from one account to another, so the all-in price might be better. Given the exchange rate you are likely to get, doing it all at once rather than subjecting yourself to repeated fees and poor rates makes sense.
For an offbeat way of benefiting, beyond dollar-denominated savings accounts, you could invest in the FTSE 100. Bear with me here. It is packed with dollar-earning companies that perform very well when sterling stumbles. They should also benefit from cuts to UK interest rates.
The FTSE 250 is a much more domestic bet, but the FTSE 100 bounced back handily after a post-referendum drop and if sterling tanks further, it almost inevitably has further to climb.
7 What is the outlook for gold?
Because of the uncertainty of how Brexit will affect the UK economy, should I switch at least some of my sterling-denominated savings and investments into gold? What is the outlook for the gold price over the next three and five years? What will affect it, other than Brexit, that I should think about?
Gold performed its role perfectly in the aftermath of the Brexit vote, writes Henry Sanderson, commodities correspondent. The metal has long been viewed as a safe haven due to the belief that it has held its value over centuries despite endless wars, financial crises and different types of paper currency. As it became clear the UK was voting out, gold shot up 8 per cent. That momentum helped propel it to a two-year high of $1,375 a troy ounce on July 11.
Still, fear only lasts so long. As markets have now calmed down, gold has lost some of its lustre. Gold investors tend to be fickle, turning to other assets once uncertainty subsides. That has seen investors pour money into US equities over the past week, sending the S&P 500 index to a record high. “Gold prices seem vulnerable to the downside as the financial markets look more confident,” Jim Steel, an analyst at HSBC, says.
As the UK battles its way through the Brexit negotiations the outlook for the gold price is likely to depend on what happens with US monetary policy and the dollar. Unlike a concentrated period of uncertainty, monetary policy is far harder for investors to predict. That is partly why most analysts and bullion dealers recommend holding only a small portion of their portfolios in gold: it may be loved in times when everything seems upside down, but when the ship steadies, gold is left at the mercy of our fast-moving financial markets.
8 North of the border
Should I invest in Scotland, given the possibility that it will break from Britain but stay in the EU?
In a word, no, writes Jonathan Eley, deputy editor of Lex. There are far too many imponderables for this to be a realistic investment strategy in anything but the long term. Will the Scots be granted another referendum? Will the nationalists win this time? If so, how quickly could Scotland become an EU member? What currency would it use? It could be years before the answers to these questions become clear.
Scottish companies have also underperformed. Paul Marsh and Scott Evans at the London Business School constructed a “Scotsie” index prior to the 2014 independence referendum. Their analysis shows that between 1955 and 2014, Scottish shares returned 11.5 per cent a year with dividends reinvested, against 12.6 per cent for non-Scottish UK shares. Scottish shares underperformed UK stocks between the Scottish and EU referendums, and they have underperformed since the Brexit vote, too.
Much of that is down to the high weighting of Royal Bank of Scotland in the Scotsie. Leaving RBS (and Standard Life, another heavyweight) aside, many Scottish companies are heavily exposed to the oil and gas industry, which is also going through a tough period. It seems unlikely that Scottish shares will outperform shares generally any time soon. Anyone seeking a Celtic winner from Brexit should look west, not north; while Ireland’s economy is closely linked to the UK’s, its biggest companies are thoroughly global and doing well.
9 Look for less volatility
Is it a good time to pull out of the FTSE 100 and put my equity investments into the US S&P 500 or the Dow?
The FTSE 100 has regained its poise after Brexit, the US indices have retaken record highs, while yield remains the holy grail for investors everywhere, writes Michael Hunter, markets reporter. The Wall Street rally has been powered by utility stocks — in no small part because of their dividend-paying prowess — while investors have switched from more glamorous growth stocks such as Facebook and Amazon.
London’s main index will benefit from the weaker pound, since the bulk of its revenues are earned in foreign currency which can buy more sterling. But over the longer term, the political outlook remains uncertain. Meanwhile, Wall Street will have to contend with higher rates before all of Europe faces such a test, which could also unnerve the markets.
Actively-managed funds have been struggling to compete with the carefully designed trackers known as “smart beta”, which have produced comparable, and sometimes better, returns which much lower fees. One brand of this approach — low-volatility investing — seeks to pick stocks less prone to big swings. The theory goes that such stocks protect against the worst of the downside, while some research suggests they also put in a more reliable, if less spectacular, showing over the long run.
“Smart beta can be achieved without looking overseas and unless you’re planning on emigrating, critically your assets are in the same currency as your liabilities,” says John Blowers, head of Trustnet Direct.
“There are ways to play currency trends within the FTSE 100 — some of its best dividend stocks pay out in dollars, and the cheap pound is driving up the prospect of potential gains from international M&A, too.”
Perhaps this is a good time for the investors to adopt an approach that we could call the “inverse-Farage”: stop thinking about national borders, and instead blend your own smart beta portfolio of low-volatility stocks that can hold their nerve in times of trouble on either side of the Atlantic.
10 Is there value in government bonds?
Why are so many investors buying UK government bonds when the outlook for the UK economy is weak and the UK has lost its triple-A credit rating? Should I also be buying these bonds, even though I am not sure if the UK is a good investment?
The answer to this depends on how optimistic you feel about the UK’s economic recovery, writes Elaine Moore, capital markets correspondent. If you believe the naysayers are wrong and Britain’s separation from the EU presents a chance for the economy to flourish then fixed income securities are not the right purchase for you.
If, on the other hand, if you think inflation and growth are likely to remain sluggish over the long term and the Bank of England will have to step in with a new round of rate cuts and quantitative easing, then locking in current interest rates in gilts may look more appealing.
Contrary to most forecasts, gilts have been one of the best assets in major global bond markets so far this year — paying double-digit total returns — and one of the biggest players in the market thinks the rally has further to go.
“Given the weak growth profile, we expect the Bank of England to cut official rates toward, but not below, zero, and thereafter consider quantitative easing if further stimulus is deemed necessary,” says Mike Amey, head of sterling portfolios at Pimco. “This should support gilts.”
Finally, a word on that precious AAA rating. The loss is embarrassing to the government but has had no discernible impact on government bond prices. The UK has never defaulted on its debt and even without a gold-plated credit rating, it is not expected to start now.
The opinions in this article are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent permitted by law