Ask any UK-based investor what their biggest concern is for the next five years, and I bet Brexit will be the answer.Â
With just under a year to go until the UK officially leaves the European Union, and no deal in sight, Brexit has become even more of a national talking point.
The publication of doomsday scenarios has become an almost daily occurrence in most national newspapers. The UK boss of Amazon has even claimed there could be civil unrest in the event of no deal.
Personally, I believe a lot of these disaster scenarios should be taken with a pinch of salt. The EU is the UK’s biggest trading partner, but it isn’t our only trading partner. What’s more, the EU itself can also ill afford a no-deal scenario. A recent study from the IMF claimed that if the UK crashed out, the EU would suffer an economic slump equivalent to 1.5% of GDP. Europe’s fragile economy is still struggling to recover from the European banking crisis. Unemployment remains above 10% in key European economies such as Spain and Italy, and above 9% in France. Another economic shock is the last thing the region needs.
Still, despite my conviction a last minute deal will be struck, I think it would be foolish to state that the UK will go through Brexit unscathed. And I believe the best way to insulate your portfolio from any Brexit-related fallout is to buy the FTSE 100 (although, my colleague Harvey Jones has a different view on the matter).
Four reasonsÂ
There are four key reasons why I believe the FTSE 100 is the way to Brexit-proof your portfolio:Â
- Constituents have limited UK exposureÂ
- Company profits are linked to global growth rather than UK successÂ
- The bulk of profits are in US dollarsÂ
- A 3.8% average dividend yield.
The FTSE 100 is the UK’s leading stock market index. It is also a global index with more than three-quarters of profits coming from outside the UK.Â
Unlike the FTSE 250, which is the more UK-focused index, the fortunes of the FTSE 100’s largest constituents are linked to global growth. For example, companies like Royal Dutch Shell, HSBC, and Vodafone have UK businesses, but the vast bulk of profits are produced by overseas divisions. This means that in the event of a no-deal Brexit, disruption to operations should be minimal.Â
Most FTSE 100 companies report profits in dollars or euros, and they have limited exposure to sterling. Constituents are almost immune to sterling volatility. In the event of no deal, sterling could crash, which would be good news for the FTSE 100 as it would mean higher profits for companies bringing money back to the UK.Â
On top of the factors above, with its inflation-busting 3.8% dividend yield, an investment in the FTSE 100 will protect your portfolio from any Brexit-led inflation. We’ve already seen how inflation will rise as side effect of Brexit. As negotiations progress, I do not believe inflation will fall anytime soon so now could be the time to protect your portfolio.
Add all of the above factors together, and the FTSE 100 looks to be the perfect UK-based investment to protect your portfolio from Brexit.Â