As the UK moves towards Brexit, its impact on many aspects of life within the UK is being assessed, examined and interpreted across all sectors. A key area of focus and scrutiny is how it might affect personal finances; something which has become the subject of much discussion and debate. Special attention is being paid to how investment bonds in the UK may be altered and the ways in which individuals can ensure that their investments are the best they possibly can be.As the UK moves towards Brexit, its impact on many aspects of life within the UK is being assessed, examined and interpreted across all sectors. A key area of focus and scrutiny is how it might affect personal finances; something which has become the subject of much discussion and debate. Special attention is being paid to how investment bonds in the UK may be altered and the ways in which individuals can ensure that their investments are the best they possibly can be.
A key part of looking at how UK investment bonds may be impacted is trying to forecast potential upheaval and market change, something which is proving challenging at present due to uncertainty around how negotiations regarding leaving the EU will proceed. Expectations form a central part of any bond purchasing, yet the unknown elements that are being faced are leading to great problems in ensuring they are realistic.
Despite the fact that bond markets holding 10-year gilts did drop shortly after the initial Brexit vote, a recovery was felt soon after. Experts are feeling quietly optimistic about the outlook, however, especially in the short-term. As the pound has been weakened, so earnings of major companies have increased, and prospects for global growth are seen as strong as a result. This growth bodes well for UK investment bonds, especially if the result is interest rates picking up. With bonds and stocks falling victim to incredibly low-interest rates, ushered in by the financial crisis and never rising significantly since, a pickup in the interest rate is eagerly anticipated, due to the resultant increase in returns it would see.
Following the referendum, the yield on 10-year government bonds fell to a record low of 0.7 percent from the 1.45 percent position if held before it took place. The initial shock was short lived however, and a rebound was experienced. As consumers started to feel the impact of inflation however, a negative impact began to be felt once again in the world of bonds, with yields falling once more. This meant that corporate bond spreads have tightened. Uncertainty regarding Brexit has contributed to this, and critics suggest that further ramifications could be felt as investment decisions by many could be put back until some elements of certainty and clarity come into play. A suggested result of this, and one that is being borne out in practice, is that attractive options for investors are becoming apparent in the form of higher rewards or premiums being made available for those willing to take greater risks in their investments. This is reflected in the world of UK investment bonds and is certainly something that many are paying attention to.
Alongside the potential problems that Brexit may bring to the world of UK investment bonds, come elements of opportunity, that are currently being seized on by investors. Some have even gone on to moniker it a ‘Brexit premium’. The higher yields that reflect the expectations of uncertainty investors have are being grasped keenly, with returns becoming significant. While it is not known how long this will continue, the current expectation is that yields will remain high for the time being, which spells potential good news for investors. The opportunity to take advantage of this is most prominent in bonds that are being issued by international companies in the UK instead of abroad. The simple reason for this is that the uncertainty, combined with the weak sterling, gives higher yields within the UK compared to overseas.
Stocks and shares
While the Brexit decision initially saw markets fall, stability soon came to the stocks market, in the form of the realisation that shares in firms that made the majority of their money abroad were boosted as a result in the fall of the price of sterling. The result of this has meant a very fractured stock market, with shares in companies who have significant foreign focus carrying on to do well, while ones who are more UK focussed have done far less well. This gap could reduce significantly, however, dependent on how Brexit negotiations go, and inevitably, their end result.
The pound, inflation and interest rates
The fall in the value of the pound has had an obviously detrimental impact on certain aspects of investments, but as the pound has steadily increased since the Brexit result cautious optimism is becoming common. Any fall in the value of the pound is seen positively however by those that have investment in firms who make significant amounts of their profit overseas. If no major change in the value of the pound is encountered then it is realistic to expect that inflation should fall. Likewise, any sort of decline would see inflation remaining high, something that needs to be considered in any form of investment. Any major rise in interest rates is seen as unlikely, simply due to the Bank of England not wishing to burden borrowers with it. A severe run on the pound would necessitate this, however, and shouldn’t be totally ruled out in the current volatile political environment.
When dealing with any potentially problematic periods, it is tempting to succumb to the desire to remove all money from investments, something that should be resisted. Holding UK investment bonds, especially those that are guaranteed, should mean that the very worst scenario is that you simply receive your initial investment bond back. Withdrawing money early however usually incurs financial penalties, and with this in mind it is important to remain calm, think about things over a longer period, and make no hasty decisions. It is important though to consider the diversity of your investment bonds. To help with this, it may be beneficial to consider obtaining the advice and expertise of a professional fund manager or financial advisor, who can help make decisions aimed at diversifying investment bonds portfolios. It may also help to think carefully about any personal attitudes to risk, and whether they have altered in recent months. It might be that guaranteed UK investment bonds may appear attractive, when previously they did not.
Provided for informational purposes only. Not designed as advice. Speak to your IFA or tax advisor for advice tailored to your individual circumstances.