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How investors should navigate politics

We reveal what the current political turmoil means for your money – and some potential UK stock picks for the brave.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

It’s been a whirlwind week in Parliament. First MPs seized control of the House, then the Prime Minister booted out the 21 Conservative rebels who voted against him. Then they, along with a slew of Labour, SNP and Liberal Democrats, voted through an emergency law to stop no-deal Brexit. Where next? According to the bookies we’re headed for a snap General Election, but there will be twists and turns along the way.

What does it mean for me?

For long-term investors, arguably, nothing. If you’re investing in a SIPP, a short-term period of volatility means either a buying opportunity or a future distant memory.

But it would be reductive to be that glib; with each political bump in the road, there is a currency reaction – sending stocks in various directions like skittles. The FTSE 100 gleans more than 70% of its revenues from outside of the UK, meaning that when sterling falls, our blue chip index bounces. It takes a lot to hold your nerve when the headlines are screaming and stock prices are jumping around.

But until we know what the definitive policies of each party are, it’s difficult to say how they’ll impact your investments. One certainty is if you panic sell an asset that has been negatively impacted by Brexit, you’re crystallising a loss – and you might trigger tax implications.

If you had conviction in a stock or fund at the time you bought it, ask yourself whether those fundamentals have changed. If they haven’t, it’s usually wise to hold fire.

What should I do next?

If you’re sitting on gains, now may be a good time to take profits. Politics aside, we’re at the top end of a multi-year rally for equities and bonds across the globe. The Dow Jones has more than doubled over the past 10 years, and while the FTSE 100 has bounced around a bit in recent years, over the past decade it has gained more than 40%. Remember, past performance isn’t a guide to future returns.

Where to allocate that capital is far more difficult call. Start by checking your geographical exposure. Using our Portfolio Analysis tool, click through to the X-ray analysis to help identify the gaps in your holdings. If you don’t have much invested in the UK, and aren’t afraid of taking a punt on value, Brexit could present a buying opportunity. Take a medium to long-term view – higher-than-usual volatility is still a real possibility over the coming months.

Domestic focused UK stocks have been beaten up by Brexit in recent years, housebuilders, banks, supermarkets and retailers have all fallen from favour.

If the X-ray regional allocation pie-chart reveals you are overweight UK equities, you may need to diversify globally. Similarly, consider your asset allocation. While the doomsday soothsayers may be wrong about the catastrophic nature of Brexit, an allocation to gold may be a good portfolio hedge right now.

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Businesses beaten up by Brexit

Nicholas Hyett, Equity Analyst

Saying domestically focused businesses have been out of favour since the EU referendum is putting it mildly. Reluctance among international investors to pick up UK assets is part of the story, but companies also face fundamental challenges from falling sterling and declining consumer and business confidence. However, if Brexit is resolved relatively painlessly, a lot of the headwinds would ease and a recovery could be on the cards.

We’ve long said that Lloyds is something of a Brexit bellwether. That’s not been a point in its favour over the last couple of years, as continued political turmoil has left the bank’s shares in the doldrums. As things stand the group’s generating a healthy profit and feeding that back to shareholders through a 7.1% dividend yield, well ahead of the wider market. If economic conditions remain stable, or even improve, we see no reason that can’t continue. However, rising bad loans and reduced appetite for new borrowing following a disruptive Brexit would see Lloyds suffer.

Housebuilders are another sector that’s struggled in recent years. That’s perhaps something of a surprise. A nationwide housing shortage, record low mortgage rates and rising real wages means we should be in goldilocks territory for housing – conditions are just right. However, with companies like Barratt Developments, the UK largest housebuilder, trading below their longer term average the market is clearly nervous. There are some industry specific headwinds, not least the end of ‘Help-to-Buy’ and lucrative land banks built up after the financial crisis. But the Brexit uncertainty is weighing heavily too.

The fall in sterling has been particularly painful for consumer facing businesses which rely heavily on imports. Casual dining is one of the sectors that’s been hit as the cost of ingredients rises, especially as the sector was already struggling with oversupply. However, as the recent acquisition of Greene King by a company controlled by Hong Kong’s richest man shows, there’s still potential for those prepared to take a long-term view. We think Young’s high quality and property rich London business stands out. London is one of the regions most likely to be negatively affected by a destructive Brexit though, and Young’s consciously targets the more premium end.

The author holds shares in Lloyds

This article isn’t personal advice. If you’re not sure of the right course of action we can put you in touch with an adviser.

Unless otherwise stated estimates are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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