Resilient Portfolios in the Face of Brexit and Other Geopolitical Risks

by: , Economist and Multi-Asset Portfolio Strategist, New York Life Investment Management; Robert Serenbetz, Portfolio Strategist, New York Life Investment Management

What’s going on?

The United Kingdom (UK) Parliament voted to extend Brexit negotiations beyond the current March 29 deadline. The upshot is: Parliament does not want to leave the EU without a deal, but does not yet agree on what the deal will look like. The future of Britain’s departure from the EU rest on more votes.

Why does it matter?

The UK’s Brexit course remains highly uncertain. From here, Parliament will either look to extend negotiations, end the Brexit process all together, or continue with a no deal Brexit. In our view, an extension is most likely, but the risk associated with a no deal Brexit is high enough to warrant caution.

Uncertainty is never a good thing for businesses and investors. It makes business planning and capital allocation decisions very difficult. Additionally, speculation related to lurking geopolitical developments can make it difficult to discern cause and effect in economic data. For example, while recent data showed the UK economy growing at its fastest pace in more than two years, some speculate that it could be driven in part by pre-Brexit stockpiling. Markets can also systemically overreact to negative news or headline risk.

These developments are not all bad news – they can create portfolio opportunities. For example, if the pound falls, UK stocks can subsequently rise as they appear cheaper to international investors. Some could use the volatility as an opportunity to snap up shares of British companies. However, investors should still proceed with caution, as some asset classes and sectors may be impacted differently than others.

What to do?

With Brexit up in the air, it may difficult – even unwise – for investors to predict what’s next for Britain’s currency, companies, and economy. The only certainty is uncertainty.

How can investors protect their portfolios from uncertainty? Our research on the topic outlines a few key actions for investors:

  • Set an investment policy statement: There is always some reason to take money off the table. Turn your focus away from headline-driven concerns and towards your investment goals. Work with a financial advisor to identify any differences between your risk appetite and your actual ability to take risk in your portfolios.
  • Identify thresholds for change: There are likely some risks that would merit changes to your portfolio. Identify what constitutes an environment that is too risky before such conditions arise. If market conditions reach those thresholds, you will be prepared to make necessary adjustments.
  • Recognize your exposure: Assess your portfolio for vulnerability to geopolitical risk. Even U.S. companies listed on U.S. indices can be impacted by geopolitics through international sales or supply chains. Currency is another key transmission mechanism of geopolitical risk, via market volatility and company earnings.
  • Build resilient portfolios: Be faithful to your goals and risk tolerance, using products that enhance portfolio resiliency against the effects of risk. Keep in mind that varying your portfolio allocations too frequently can result in higher costs and missed opportunities.
  • Focus on action, not distraction: Understanding and adapting to geopolitical risk can be an endless endeavor. What really matters is how these risks could impact a portfolio.
  • Stick to good investor behaviors: A diversified and resilient portfolio can mitigate risk, such as country- or sector-specific risks. Market volatility creates fear, but it is important to stick to your long-term goals.

To hear more about how you can make your investments more resilient to geopolitical risks, register for our March 19 webinar.

About Risk

Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.

This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

New York Life Investments is a service mark and name under which New York Life Investment Management LLC does business. New York Life Investments, an indirect subsidiary of New York Life Insurance Company, New York, New York 10010, provides investment advisory products and services. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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Lauren Goodwin, CFA

Economist and Multi-Asset Portfolio Strategist, New York Life Investment Management

Lauren Goodwin, CFA is an economist and multi-asset portfolio strategist with New York Life Investment Management’s Multi Asset Solutions (MAS) team, which has $10B in assets under management. She joined NYLIM in 2018 to focus on global macroeconomic trends

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Robert Serenbetz

Portfolio Strategist, New York Life Investment Management

Robert Serenbetz is the Portfolio Strategist with New York Life Investment Management’s Multi Asset Solutions (MAS) team. He contributes to investment thought leadership and communication efforts across New York Life Investment Management

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