With markets reacting to every morsel of news, it is natural to wonder how all of this affects your investments.
first it’s important to accept the degree of uncertainty around Brexit, and the
limits of our knowledge. We still don’t know for sure which of the mooted paths
from here is most likely, and nor do we know exactly how each of those paths
would affect markets. The range of possibilities is incredibly wide, and it’s
very hard to predict the outcome of a political rumble.
At Orbis, we don’t believe it’s necessary for us to know how Brexit will
play out in order to have a sense of how our global Funds may be
affected. The lens we use to assess the potential impact may help you
consider the impact on your global investments too.
Brexit may impact:
- Exchange rates
companies you invest in
What if the pound weakens?
Global investing means global currencies. A weaker pound would be beneficial to UK-based investors who are exposed to a diversified range of global currencies—the dollar, euro, yen, and others, in addition to sterling. The value of assets exposed to foreign currency should then rise relative to the pound.
Some investment managers, like us, actively manage currencies with the aim of keeping clients exposed to those that they believe will hold their value. We have also bought short-term protection in our Global Balanced Fund in case of a sharp decline in the pound.
What will happen to the underlying investments?
a huge deal for the UK, and a big deal for Europe, but it isn’t as big an issue
for many other markets—which account for 80% of the global equity universe. If
most of your holdings are elsewhere, this may offer protection from a negative
impact on UK markets.
Foreign revenues means businesses can potentially benefit.
investments are based doesn’t tell the whole story. We think that what really
matters is not as simple as whether a company is based in the UK or where its
shares are traded. It’s necessary to look deeper to see how a company may be
affected by Brexit.
stocks that are global consumer businesses often have a significant portion of their
assets outside the UK. Companies such as BP and Shell, for example, not only
have most of their assets offshore, but oil is also generally traded in
The foreign revenue these businesses earn means they can actually benefit when their home currency weakens. This is because a weaker pound makes it easier for companies to pay their dividends. Indeed, when the pound fell following the Brexit referendum, both BP and Shell saw their London share prices rise.
How foreign revenue can mean businesses benefit from pound weakness
about the effects of exchange rate changes on a company doesn’t come naturally
to most people. Often the logic feels upside down. Imagining a slightly
different situation can make the logic more intuitive:
Say that instead of being paid in pounds and pence, you were paid in gold. A salary of 72 grams of gold per month at today’s rate would be worth about £2,280. But what would happen if the price of gold rose by 50%? You would still be paid 72 grams of gold but this would now be worth £3420! Assuming all your bills are paid in pounds, your mortgage or rent just got easier to pay. In effect, your job just got more profitable, even if you don’t earn a single extra gram.
Now consider the position of a global business based in the UK:
When local headlines are scary, a global view helps
If you focus on just your home market, you’d better have a very clear view of things that affect that market. That’s very hard when the drivers are as transformative and uncertain as Brexit is.
Orbis Investments: A global active fund manager, founded in 1989, with 10 global offices (two in London). Learn more about Orbis.
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