Make Brexit work for EU! What deal means for your portfolio or pension

Boris Johnson’s Brexit deal, which is likely to be approved by Parliament today, ends more than four years of political uncertainty for the UK and EU.

It commits both sides to maintaining free trade across the Channel. And while its full impact won’t be known for years, almost all forecasts agree the deal is good news for the economy.

Last week, a group of senior economists predicted the deal would boost growth by more than 5 per cent next year.

Last week, a group of senior economists predicted the Brexit deal would boost growth by more than 5 per cent next year, helping supercharge our Covid recovery

The pound rallied on news of the deal – reaching an 18-month high against the dollar – while the FTSE 100 jumped nearly 3 per cent when it opened yesterday after the Christmas break.

But what might the Brexit deal mean for your investment portfolio or pension?

Out of favour

Whatever its political merits, Britain’s vote to leave the EU was a big shock for the markets.

The morning after the result the FTSE 100 dropped 8 per cent, with the pound hitting its lowest level since the 1980s.

Stocks recovered some of their losses, but the FTSE continued to underperform its European rivals, with investors unsure whether a deal would be struck.

Many voted with their feet, with more than £30 billion pulled out of UK funds (16 per cent of their 2016 total) over the past five years.

Meanwhile, the share of UK stocks included in global equity funds has fallen by one third, to around 6 per cent.

Relief: The deal ends more than four years of political uncertainty for the UK and EU and commits both sides to maintaining free trade across the Channel

New hope

Susannah Streeter, an analyst with investment service Hargreaves Lansdown, predicts the deal could trigger ‘fresh optimism’ about the UK’s future.

While it has boosted the FTSE, she points to much bigger rises for those sectors who had been most fearful of a ‘No Deal’.

Banking shares (including Barclays, Lloyds and NatWest) all jumped more than 10 per cent, as fears of a major economic shock, and the prospect of negative interest rates, faded away.

Homebuilders and travel companies were also among the week’s winners, with IAG Group (British Airways’s owner) rising 20 per cent within five trading days.

There had been fears that an acrimonious ‘No Deal’ outcome could have seen British planes banned from landing in Europe.

But while the deal has taken such nightmare scenarios off the table, there are still some big questions ahead. 

Although the deal covers manufactured goods, it doesn’t cover what trade lawyers call ‘services’ — everything from banking to IT and industrial cleaning — which make up nearly half of our EU exports.

Sterling work: The pound rallied on news of the deal – reaching an 18-month high against the dollar

What next?

Any disruption from Brexit is eclipsed by a more immediate threat to Britain’s economic recovery: Covid.

Forecasters are already predicting the resurgent virus, and continued lockdowns, will mean more economic pain in 2021.

Ultimately it will be up to the vaccine roll-out to bring Britain’s economy back to life.

Provided that can be done, Ms Streeter predicts the fundamentals of the economy point towards a strong recovery.

‘Since the start of 2020, companies have raised £80 billion in net finance, triple the usual amount raised,’ Ms Streeter says.

‘Much of that money is ready to be deployed, and optimism is set to seep back into boardrooms now that a deal has been done and vaccines are here.’

Wider view

Though Brexit will have big consequences for Britain’s future, investors should be wary of overestimating its immediate impact on their portfolio.

If you have a pension, your savings will almost certainly be divided between different investment funds – many of which won’t be affected by Brexit at all.

Meanwhile, DIY investors typically spread their money across funds focused on different world markets – for example, the U.S. or China – as well as the UK.

That said, some investors will be upping their exposure to UK funds, seeing them as a potential growth asset for next year.

Investment bank Goldman Sachs has long touted British investments as undervalued.

Buy British

If you’re feeling as bullish as Boris, it’s worth remembering that a successful Brexit won’t necessarily mean a higher FTSE.

A rising pound isn’t good news for the big exporters of the FTSE 100, which will face higher costs.

Pitfall: A rising pound isn’t good news for the big exporters of the FTSE 100, who will be lumbered with higher costs

Generally it’s the smaller FTSE 250 -which features the likes of M&S, Trainline and TalkTalk – that is more likely to benefit from a Brexit bounce. 

A more cautious option is to invest in managed funds, which factor these nuances in, while betting on a wider recovery.

The investment platform AJ Bell produces an online directory of its favourite funds for novices.

These are typically split into income funds (which seek slow, steady income) and growth funds (which look for undervalued investments).

For income investors, they recommend Threadneedle’s dividend-driven UK Equity Income Fund, whereas Franklin’s UK Mid Cap Fund is listed as a strong growth fund. 

Both have performed above average, making a £10,000 investment spread evenly across the two in 2015 worth around £13,000 (before fees).

Those with a bigger risk appetite can look to ‘value’ funds which invest in companies they consider undervalued.

Polar Capital’s UK Value Opportunities Fund currently invests in Morrisons supermarkets, as well as London-based retailer Watches of Switzerland.

All three funds should be well-placed to make the most of those ‘sunny uplands’ the Prime Minister has promised – making them a decent Brexit bet.

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This post first appeared on Dailymail.co.uk