Should Financial Advisors Re-Assess Brexit In Their Clients’ Portfolios?

With U.K. economy on the upswing, were the experts wrong about Brexit? And should the U.K. play a role in your client’s portfolio?

Recently, the Bank of England reported that predictions of a Brexit-driven economic slide were vastly overrated.

Positive numbers linked to the U.K. economy are “proof that the fundamentals of the British economy are strong,” said Philip Hammond, chancellor at Bank of England. “As the economy adjusts to the effect of the referendum decision, it is doing so from a position of economic strength.”

In its report, which canvassed business owners throughout the U.K., Bank of England said it’s “business as usual” in the U.K. This is despite widespread claims of economic anarchy from Brexit critics. The view down the road, though, is not exactly crystal clear.

“The outlook for investment is uncertain,” the report stated. “The majority of firms spoken with did not expect a near-term impact from the referendum result on their capital spending. But around one-third expected some negative effects over the next 12 months, with reports of a ‘risk off’ approach to expenditures and some imminent plans for spending slipping.”

Additionally, the International Monetary Fund hiked its 2016 gross domestic product forecast for the U.K. This gave Brexit-backers more evidence that any economic fallout from the June 23 vote was exaggerated.

“Despite all the naysayers that warned of doom and gloom if Great Britain left the European Union, it is quite clear that most of these concerns very overly inflated,” said Vic Patel, founder of Forex Trading Group. Three months after the Brexit vote, “consumer and investor confidence is high in Great Britain … and I believe this trend will continue going into 2017 and ahead.”

Not All Rosy News

It’s not all positive news for the British economy, though.

Prices across most U.K. retail categories declined, according to Adobe's monthly Digital Price Index for August 2016. in addition, online sales for durable goods such as computers and televisions dropped sharply on a year-over-year basis.

“While demand in both categories was up in May and June - 33 and 28 percent respectively - growth in July slowed to 16 percent and turned negative in August with a 10 percent decrease in sales, likely due to Brexit and other factors driving uncertainty in Europe,” the Adobe report states. “Demand in the U.S. in the same categories saw strong growth in July and August with 33.7 and 30.2 percent increases, respectively.”

Part of the problem is that economists and analysts simply don’t have enough good data from which to draw firmer conclusions.

“The Adobe data suggest that prices for groceries and electronics did not change significantly. Consequently, it will be important to keep monitoring the data in the months ahead,” said Austan Goolsbee, professor of economics at The University of Chicago’s Booth School of Business, and former chairman of the Council of Economic Advisers.

That begs the question, should financial advisors re-assess the Brexit vote, and possibly look at Great Britain as a foreign landing spot for client portfolios? There is some strong sentiment to do just that, according to global money managers.

“The effect of the vote did bring an element of turmoil to the U.K., with the pound dropping to its lowest prices in decades and the FTSE falling massively,” said Sam Norris, a mortgage and finance specialist at Charnock Hughes in London. “Since then, however, there has been steady improvements in the former, and full recovery in the latter.”

'Only Strengthened'

Very few economies in the world can compete with the level of strength that the U.K. currently is showing (the International Monetary Fund ranks it first among the so-called “Group of Seven” global economic leaders), Norris said.

“The drop in the pound has made U.K. property cheaper to overseas investors, and with the same levels of capital growth. From our vantage point, U.K. property, already seen as one of the best investments for the international investor, has only strengthened,” he added.

London is still the only financial capital to be able to trade with the world in a single day, Norris said. And, in the wake of Brexit, there was worry that a number of multinational headquarters would move to Hong Kong or Berlin, “but that has not materialized.”

“The real question is whether there will be a lasting impact on global markets,” said Andrew Cohan, managing director at Horwath HTL, a hospitality consulting and financial advisory firm in Miami. “After the first week of January this year, when the Chinese markets tumbled, my business, which depends heavily on new hotel development, did not receive a phone call for 10 days. However, by the end of January, business was back to normal.”

In the longer term, investors can expect London to return to its "pre-Brexit" status just as Hong Kong did after the period of uncertainty it weathered surrounding "the Handover" of the territory from the U.K. to China in 1997, Cohan added.

“Economic and political shocks seem to recover in the same manner as natural shocks such as hurricanes and earthquakes: there are always individuals who find a way to profit in the aftermath and reconstruction as well as many who get temporarily or permanently displaced,” he said. “But eventually, a new order is restored."

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at [email protected].

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