Investment 6-month review
With six months of the calendar year gone, three months of the financial year gone and Brexit scheduled for three months in the future now could be a very good time for investors to review their portfolios both in general and in the light of what Brexit could bring. Here are some points to consider.
Increases in interest rates could hurt those who use leverage
At the end of the day, debt is a commitment whereas investment returns are not guaranteed. This means that using leverage is always a risk, but the extent of the risk varies according to the cost of the finance, or, in other words, interest rates. If a hard Brexit sees the pound take a sharp downturn, then it is entirely within the bounds of possibility that interest rates will go up. Indeed they may have to be increased to curb inflation, (unless the government is willing to change the inflation target, which would bring another set of challenges). To put this in historical context, back in 1979, one of the earliest actions of the Thatcher government was to raise interest rates to 17% in order to curb inflation. Admittedly, the prevailing interest rates were already much higher than they are now, but from a historical perspective, double-digit interest rates are certainly not “black swan” events, especially if you focus on the 20th century. Investors might, therefore, want to think very seriously about their ability to cope if interest rates head upwards and, if necessary, take prompt action to reduce their leverage.
The pound could be weak and/or volatile
Leaving aside the issue of interest rates, a weak and/or volatile pound could present a challenge to investors who either have commitments overseas (e.g. mortgages with EU-based lenders) or who wish to acquire (income-generating) assets overseas, possibly in order to create a hedge against what could happen to the pound over the foreseeable future. Those with commitments overseas are strongly recommended to think particularly carefully about worst-case scenarios and their ability to manage them and potentially at least start taking steps to limit their exposure in the event that the value of the pound does drop. Similarly, investors who are interested in acquiring assets overseas might want to look at opening an overseas bank account in the relevant local currency so as to spare themselves the hassle of dealing with fluctuating exchange rates.
Investment can be a route to residency
Some people in the UK may qualify for EU (or other) passports based on ancestry, but for those who don’t, there may be other possibilities, such as “Golden Visa” schemes, which allow for residency to be obtained based on investment. This may then, ultimately, qualify people for citizenship if they so wish. Ideally, if investors wish to benefit from one of these schemes, they should aim to do so in a way which makes sense overall (in terms of their financial and life goals) as well as qualifying them for the Golden Visa scheme. Unless investors are in a particular hurry to qualify for residency, this may be best achieved by gradually adjusting a portfolio, one step at a time, until it meets the necessary criteria, rather than by making major changes in a short time frame. This will allow investors to familiarise themselves with the local market and put them in a better position to pick the right investments rather than just grabbing qualifying investments. It may also be worth investors looking for people with expertise in the local market, perhaps people who actually live there or who specialise in investing there. As a minimum, they should make sure that they really understand the differences between their proposed new home and the UK, even if these differences are subtle, they can still make themselves felt and sometimes they can be expensive.