The Brexit conundrum

15 February 2019

The newspaper headlines have been, understandably, full of Brexit stories.

With such a significant political event in sight, it would be tempting to conclude that financial markets were being driven by Brexit uncertainty over the past few months. But what does that mean? Lower corporate profits? A weaker currency? Higher or lower inflation and interest rates? A property market crash? There have been many confusing headlines and forecasts made over the last few months. 

Even at the time of writing (mid-February, with seven weeks to go until Brexit), it is not clear what will happen. Financial markets don’t like uncertainty. Worry and uncertainty tends to cause investors to require a higher risk premium to invest in assets with such an event on the horizon. So it would be reasonable to conclude that this anxiety leads to prices of risky assets, such as company shares, to be lower than otherwise. With a UK focus, and knowing that the price level of the FTSE All-Share Index fell by nearly 13% in 2018, it would be easy to blame Brexit uncertainty for the market performance. But this analysis misses a crucial point – that all major global stockmarkets also fell in 2018. At times it seems that some movements in sterling are linked to Brexit headlines – but here too this is overly simplistic. The trend in global currency markets in 2018 was that the US dollar was generally strong, supported by a central bank in interest rate tightening mode. Sterling, meanwhile, has been remarkably stable against the euro in the past year or so. A similar conclusion can be drawn about UK government bonds (gilts) [1] – international factors appear to have been more significant than domestic issues. The prices of 10-year gilts ended 2018 at levels close to where they were just before the June 2016 referendum.

A key factor affecting financial markets in the past 18 months has been US monetary policy. Interest rate expectations started to rise in late 2017. Initially, financial markets ignored the impact, but then in February last year markets woke up to the influence of higher rates and this effect was evident at various points throughout the year when markets sold off. Brexit is an additional uncertainty but is only part of the story. UK financial markets do not operate in a domestic vacuum. International factors are crucial.

So where do we go from here? Many commentators are fearful of a phase of sterling weakness, such as that which took place after the surprise Brexit vote in June 2016. This is one possibility, although arguably even a ‘no-deal’ Brexit would be less of a surprise to markets than the outcome of the vote in 2016. And there are offsets – a weaker currency was associated with very strong profit growth in late 2016/2017, since a large proportion of UK company profits come from overseas. Headline inflation picked up, but only on a temporary basis. It’s an uncomfortable conclusion but we accept that we don’t know how financial markets will initially react to Brexit events. But we do know that UK financial markets do not operate in isolation. International factors will continue to exert a significant influence.

Profit growth of listed UK companies, 2014-2018

Source: Datastream, February 2019.

Inflation remains the key long-term threat

Most charities remain under constant pressure to grow and protect income alongside the value of capital assets. Ensuring that the real value of income and capital are protected enables your charity to do more and helps to safeguard your future.  With other sources of funding under increased threat, income from investment portfolios is playing a more prominent role in many operational charities for whom a regular cash-flow is vital.

But it is our old enemy inflation[2] that we must keep a constant eye on, both to ensure that invested capital maintains its real value, and that the level of income maintains its real power to benefit society. In the UK, inflation as measured by the Retail Prices Index (RPI) had fallen to 2.5% by midFebruary. 

Nonetheless, it is sobering to note that in the 10 years to the end of December 2018, every £1,000 held in the average UK instant access savings account would have grown to just £1,014, whereas RPI inflation has led to charities needing £1,337 to do the same amount of good as £1,000 would have achieved at the end of 2008. The magnitude of this “inflation gap” remains under-appreciated.  This should certainly focus minds!

Many “safer” assets such as cash deposits, UK and other western government bonds[1] are offering negative real returns; in effect, if you buy a 10-year UK government bond, or gilt[3], you are paying the government for the privilege of you lending them money!

Outlook for 2019

Based on RPI inflation averaging around 2.5% during 2018, we believe that long-term charity investors seeking income should continue to favour a significant bias towards equity funds offering a diverse spread of exposure to quality UK and international businesses. Minority weightings in bonds and property continue to play their role in managing capital volatility, but it is equities that continue to offer the greatest potential to deliver high, growing income streams and UK equities look to be offering more compelling value right now.  Far from abandoning our home market in favour of more overseas exposure, we would encourage charities to consider taking advantage of the recent market turbulence and increase UK equities exposure while income yields remain high and lowly valuations relative to the majority of other world markets offer attractive buying opportunities.  


The value of investments and the income from them may go down as well as up and a charity may not receive back all its original investment.

We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser. The views expressed in this document should not be taken as a recommendation, advice or forecast.


Richard Macey 

Director of Charities – M&G Investments

E-mail; [email protected]

15 February 2019



  • GOVERNMENT BONDS: Fixed income securities issued by governments, that normally pay a fixed rate of interest over a given time period, at the end of which the initial investment is repaid. Bonds –
  • INFLATION: The rate of increase in the cost of living. Inflation is usually quoted as an annual percentage, comparing the average price this month with the same month a year earlier.
  • GILT: A fixed income security issued by the UK government. 

This Financial Promotion is issued by M&G Securities Limited. Registered in England No. 90776. Registered Office is Laurence Pountney Hill, London EC4R 0HH. Authorised and regulated by the Financial Conduct Authority in the UK. NAACIF’s charity registered number is 223887.

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