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How does the Brexit influence investing?

The foreign exchange market has had the most and quickest impact. The British pound suffered its biggest blow in thirty years after the referendum. The consequences for owners of British shares are correspondingly. But what else could be influenced by the Brexit? The long-term consequences are hard to predict because a lot will depend on the trade agreements the United Kingdom will have (re)negotiate now. 

 

There are a number of clear general short-term consequences

  • Shopping in London is cheaper: most economists predicted a 10% decrease for the British pound. This actually happened and Peter Vanden Houte, chief economist at ING Belgium, warns us the British pound may devaluate even further. “After the first blow, the pound seems to have stabilized somewhat, but it is possible that in the next coming months we go to 0.85 – 0.90 pound per euro.” Concretely this means we will get more pounds for an equal amount of euros. Therefore, a weekend shopping trip to London becomes much cheaper.
  • Lower budget for travelling in the US:  The effects of the Brexit will also be felt on continental Europe. Economy experts believe that on the middle long-term the euro is headed for equivalency, where 1 euro is only worth as much as 1 dollar. Currently the value of the euro is around 1.11 dollar. Those who make online purchases will feel the depreciation of the euro. Whatever is purchased from the US, will be converted into euros, which will be more expensive due to the unfavourable exchange rate.

British and European shares decrease in value

Investors will feel the Brexit as well. 1.4 million Belgians have a pension savings fund and indirectly own shares via those funds. The losses in those fund portfolios however are not as significant as the drop in shares, because pension savings funds invest at least a quarter of its assets in bonds.

Banks are most sensitive to the economic climate and have to endure more serious blows. Their risks lie in payment defaults on loans to British companies or on loans to European companies troubled by the Brexit.

 As an investor, there is not much that you do. “Things will be shaved now”, says Dirk Thiels, strategist at KBC Asset Management, referring to an ancient wisdom in the stock market: “When you are being shaved, you have to stay still. Or you risk losing vital parts. The worst thing you can do when investing is to sell everything. If you have some cash on hand, now is the time to invest.” Investing in diamonds is a good diversification. Diamond prices have not been affected.