You are here: Home - Investing - Experienced Investor - News -

Four alternatives to gold post-Brexit

Written by: Justin Onuekwusi
Gold has proved to be an extremely popular asset class as investors sought safe havens in the immediate aftermath of Brexit. But would they be better served looking at other assets?

As an asset allocation team that takes more of a medium-term investment view, we typically tend to look through short-term macroeconomic and political noise. However, when the short-term risks are significant enough, we act.

Following the UK’s vote to leave the European Union (EU), other global events have continued to capture our attention. Given the various political and economic uncertainties unfolding in Europe, combined with concerns about the Federal Reserve (Fed) increasing rates more quickly than expected and the possibility of a Chinese hard landing, we have reduced our overall risk outlook from neutral to negative.

Today, the opportunities for multi-asset investors extend much further than traditional safe-haven assets such as gold. As the dust settles following the EU referendum, talk of ‘Brexit means Brexit’ will continue. But the multi-asset universe is laden with opportunities and is constantly expanding. It is the role of the investor to adapt and evolve within it. Volatility creates opportunity, and as Peter Lynch once said: “The person that turns over the most rocks wins the game.” This is particularly true for multi-asset investing.

1. Interest rate sensitive sectors

As many anticipated, the Bank of England (BoE) acted aggressively to address post-referendum market volatility and reduced interest rates in August. This benefitted interest rate-sensitive sectors such as hard currency emerging market debt (EM debt priced in US dollars) and global real estate securities.

A further tailwind comes in the form of ‘lower for longer’ rates, which are likely to exacerbate the demand for yield and reduce the expected cost of debt for these asset classes.

2. Black gold

All that shines is not necessarily gold. The price of oil plunged in the immediate aftermath of Brexit, but it has since recovered from its lows. Indeed, we have been seeing upside risks in the oil market, which could start to move back into balance after two years of oversupply.

Rather than a cause for concern, recent falls may prove an opportunity for multi-asset investors to begin increasing their exposure to the energy sector once more. Given the relative weakness of energy-related equities in the last two years, stabilisation in the oil price could lead to significant gains in the sector.

3. GEMs regaining their sparkle

Emerging market equities have always been one of the more risky asset classes in the multi-asset investment universe, and China’s growing debt remains a cause for concern. But as oil-related sectors gain appeal, so too do the prospects for many emerging markets linked to oil and mining companies.

Of course, prospects for global emerging markets (GEMs) are also tied to changes in Fed policy. But while a Fed rate hike and Chinese hard landing are clear reasons to be cautious and even underweight emerging markets, investors may look to benefit from the changing outlook for oil-linked economies by reducing this underweight somewhat.

4. The UK conundrum

In contrast to 2015, 2016 has proved a challenging year for active UK equity funds: the average manager has underperformed the FTSE All-Share Index by over 4% year-to-date (YTD).

A reason for this has been the strong performance of the FTSE 100, which makes up the largest 100 companies in the FTSE All Share (i.e. large cap companies). Given the huge falls in the value of sterling in 2016, the FTSE 100 has significantly outperformed the FTSE 250 (representing the next largest 250 companies in the FTSE All Share i.e. mid-cap companies) – returning almost 14% versus just over 5%. Amazingly, this would place the FTSE 100 Index in the top decile of the IA All Companies sector year-to-date.

History shows the average active UK manager underperforms when mid-cap companies suffer significant underperformance. Relative to other developed equity markets the FTSE All-Share is uniquely concentrated. Indeed, the top 10 stocks constitute over 40% of the overall weight of the FTSE All-Share. To outperform, UK equity managers will typically have to descend the capitalisation spectrum and adopt more mid-cap risk. However, as sterling falls – which it has been doing both pre- and post-EU referendum – larger caps benefit because some 75-80% of their revenues are driven from overseas, versus only around 50% for many mid-caps. If sterling continues to weaken, this trend of underperformance is likely to continue – which would of course benefit an index strategy over active funds.

While many investors have benefitted from a structurally lower weighting to mid-caps in favour of large-caps in 2016, they may want to start increasing their mid-cap exposure again if they believe we are coming to the end of sterling weakness. However, it is important to remain vigilant of the risks, because a weighting to a UK index fund – and specifically, a large cap strategy – could help to hedge any further Brexit uncertainty over the medium term.

Justin Onuekwusi is manager of the Legal & General Investment Management (LGIM) Multi-Index fund range

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

The savings accounts paying the most interest

It’s time to get your finances in shape, and moving your cash savings to a higher paying deal is a good plac...

Everything you need to know about being furloughed

Few people had heard of ‘furlough’ before March 2020, but the coronavirus pandemic thrust the idea of bein...

The experts’ guide to sorting out your personal finances in 2021

From opting to ‘low spend’ months to imposing your own ‘cooling-off period’, industry experts reveal t...

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

Having a baby and your finances: seven top tips

We’re guessing the Duchess of Cambridge won’t be fretting about maternity pay or whether she’ll still be...

Protecting family wealth: 10 tips for cutting inheritance tax

Inheritance tax - sometimes known as 'death tax' - can cause even more heartache for bereaved families. But th...

Travel insurance: Five tips to ensure a successful claim

Ahead of your summer holiday, it’s important to make sure you have the right level of travel cover or you co...

Money Tips of the Week