On the 31 January 2020, the UK left the European Union, with a transition period to run until the end of the year. The end of the transition is fast-approaching and, while most of us have been preoccupied and overtaken by other events, the clock is ticking on. "There is a lot of uncertainty around," says Jonathan Sparks, Chief Market Strategist, UK & CI,
HSBC Private Banking. "Not just with regard to the lack of clarity about the terms of a Brexit deal, of course, but more widely, with the unknown trajectory of the pandemic and the forthcoming US elections. That creates the potential for volatility and makes now the opportune time to take stock of your commitments and exposures."
Potential currency swings
As we have already seen since the EU Referendum in June 2016, a lot of this uncertainty will be played out through currency. With Sterling having lost ground to the euro since the pandemic hit, and the UK one of the worst affected of the major economies1, understanding how currency swings may impact your portfolio is essential.
"Everyone's situation will be different in terms of their exposure to currency fluctuations, and it's not always obvious," says Jonathan. "For example, if the pound falls significantly and your income is tied to that, yet you have a debt to service in US dollars – perhaps your son or daughter is at school in the States – then there's no doubt that you'd be hit hard by that."
The same is true of any individual who has commitments overseas, for example, those with second homes or other property obligations. "For example, if you bought a property in France but, for simplicity's sake, that's 100 per cent financed by a mortgage you took out over there, then you have no currency exposure," explains Jonathan. "But if there's an imbalance between the currency your debt is denominated in and the currency you're servicing that debt with, that's potentially a risk."
Taking stock of your commitments
Volatility, of course, can work both ways – the pound could go up. "It's about evaluating your commitments, understanding your immediate and long-term needs, and working to reduce your short-term exposure to any currency volatility as far as possible," says Jonathan.
The extent of any volatility will largely depend on whether UK and EU officials can agree on a deal before the transition deadline expires, as well as the terms of that deal, but considering possible scenarios and their impact on your portfolio now puts you in the driving seat. For individuals with business interests or those who trade overseas, the implications may be even more complex, and will need to be factored into the whole picture.
Now is the time to act
"Once you've drilled down and evaluated what your risk and exposure levels are to any potential currency volatility, you can review that in light of your personal risk appetite or tolerance," says Jonathan. "If you're not comfortable with that, you may want to consider hedging your exposure and there are various options available."
As we approach the final quarter of 2020, ensuring you have a thorough understanding of how the end of the Brexit transition period could play out in terms of your portfolio will place you in a stronger position to manage and mitigate any risk associated with that. "You can't leave thinking about this until the last two weeks in December," says Jonathan. "With Brexit just one of a number of events that could potentially have a destabilising effect on markets and the economy – for example, the US election and, let's not completely forget the pandemic – the time to review and plan is now."
If you would like to discuss preparing for Brexit and the options available to reduce your exposure to potential currency volatility, contact your Relationship Manager or Investment Counsellor.