The FTSE 100 may have rebounded strongly since the market wide Brexit chaos on the morning of 24 June, yet with the on-going uncertainty in relation to how and when the UK is actually going to leave the EU, I believe there’s a strong chance that the market is likely to endure bouts of Brexit-related turbulence in the next few years.
With the market currently enjoying a period of relative calm, now could be a good time to examine your portfolio and ask yourself whether it’s Brexit-ready.
Spread the risk
Diversification is one of the fundamental principles of risk management and one of the simplest things that investors can do to improve the risk-to-reward profile of their portfolios. While there’s no clear cut consensus on exactly how many stocks you should own to be properly diversified, you should look at whether your portfolio is sufficiently diversified across enough stocks and different areas of the market to prevent one or two bringing your whole portfolio down in the event that those companies run into difficulty.
Limit UK exposure
With the possibility of the UK falling into a recession on the back of Brexit, it could be a good idea to limit your exposure to stocks that generate the majority of their earnings in the UK and focus on those that have global revenue streams.
For example, Lloyds Banking Group earns 100% of its income from the UK and therefore could be heavily impacted from a downturn in the UK economy, whereas drinks manufacturer Diageo generates revenue from the US, Europe, Asia and Latin America as well as the UK, and therefore should be more resilient.
Be careful of small-caps
Don’t get me wrong, I’m a fan of having some small-cap exposure in a portfolio in an effort to boost returns, but investors should be aware that during periods of market turbulence, small caps stocks are often hit the hardest as investors flee to safety. Whereas a blue chip FTSE 100 stock might fall 15% during a share market panic, a small-cap stock could fall 50%. Therefore, it’s a sensible idea to not be over-exposed to this area of the market.
Boost income with USD dividends
The pound has weakened considerably since the Brexit result and there’s a possibility that it could fall further. Some analysts are even predicting sterling to fall to parity with the US dollar. While this is bad news for anyone planning to spend their money abroad, one way to offset this decline in sterling is to look at stocks that pay their dividends in US dollars.
Two examples here are the oil majors Royal Dutch Shell and BP that both pay their dividends in USD, so with the recent fall in the pound, their dividends have now become more valuable to UK investors. Both companies are now yielding over 6%, so it’s no surprise that their share prices are rising.
Stockpile cash
Lastly, it always pays to have some cash on the sidelines, ready to deploy when an opportunity arises. Experienced investors know that there’s no need to always be fully invested, and by having cash available, it gives you the option to buy a bargain when you spot it.