Cambridge Associates: Investors Should Ignore Brexit Distractions

Investors should not plan to make any big trades based on their views on Brexit, according to consulting firm Cambridge Associates.

Although Brexit day – March 29 – looms for the United Kingdom, Britain still has not solidified its plans for leaving the European Union. Because of this uncertainty, Cambridge recommended in a report this month that investors focus more on adequate diversification and liquidity than on making any calls when it comes to whether the U.K. will ultimately leave the E.U.

“Because Brexit is a political process with two-way tail risks, it warrants close monitoring, but is not a good foundation for a tactical investment position,” Cambridge said in the report.  

If U.K. prime minister Theresa May accomplishes what she had previously set out to do — make a relatively clean break from the E.U. and put in place a new bilateral trade agreement — Brexit’s effects likely won’t be clear for months, or even years, according to the report.

“Investors should therefore maintain a long-term perspective and ignore the near-term Brexit noise, though that is easier said than done,” Cambridge said.    

According to the report, the Bank of England has estimated that Brexit negotiations, which have been ongoing since 2016, cost the U.K. economy two percent of gross domestic product. Brexit-related risks have also resulted in lower valuations for the British pound and the country's stocks compared to their historical averages, the consulting firm said. 

“Since the Brexit referendum, businesses have put investment plans on ice, the conservative government has continued to shrink the fiscal deficit, and the U.K. economy has become more reliant on increasingly indebted and decreasingly confident British consumers for growth,” Cambridge said.

With all this in mind, it’s clear that some of the effects of Brexit – and its potential outcomes – have already been borne out in the U.K. economy, according to the report. Cambridge recommends that sterling-based investors do not change their currency positions based on their predictions for Brexit’s outcome.  

“Few investors have an edge in predicting political processes like these, and for most, hedge ratios should factor in spending and liquidity needs, institutional risk tolerance, and cost of hedging, rather than expected currency movements,” according to Cambridge.  

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One thing investors can do, according to the firm, is to increase their allocations to global stocks outside the U.S. This will help investors to take advantage of the wide spreads between valuations in the U.S. and equities outside the country, according to Cambridge.  

Investors should also make sure their portfolios are diverse and liquid, the firm said. They should have some U.K. currency exposure to meet any spending needs and to be ready to take advantage of any future Brexit-driven market moves, according to Cambridge.