STT State Street Corporation

By Gerrard Cowan 

While the precise date and nature of Brexit are up in the air, investors should still be preparing themselves.

The date set for the U.K. to leave the European Union is March 29, though the terms of that departure remain unclear. Recent political maneuvering as well, including the possibility of a new referendum, leave open to question whether Brexit will occur at the end of March -- or at all.

The possibility remains, nevertheless, that Britain at some point will leave the European single market and customs union with no provisional or substitute deal in place -- a so-called hard Brexit -- which many believe would cause severe disruptions in British trade with the Continent.

Matthew Bartolini, head of SPDR Americas Research at State Street's State Street Global Advisors, says all investors should be concerned even if they have no exposure to British or Europe-focused funds. An exit without a deal, he says, could have implications for the world economy, trade and supply chains, with particular impact on global equities, bonds and foreign exchange.

Mr. Bartolini suggests that investors look at what happened after the referendum in June 2016 in which Britain voted to leave: Small-cap U.S. stocks, which are domestically focused, fell 7%, as measured by the Russell 2000 index. "That shows how Brexit-related volatility has a high probability of permeating the global landscape," the analyst says.

A deal still could be struck that brings about an orderly exit, Mr. Bartolini says, which would be a boon for stocks and other assets in the region.

Funds' preparations

So how should investors plan in the midst of such uncertainty?

A spokesperson for mutual-fund giant Vanguard Group says, "It's important to note that Brexit negotiations have been going on for quite some time now," and markets have already priced much of the uncertainty that exists into the funds. New uncertainty in the U.K. and Europe could spill over to global financial markets, posing particular concerns for U.S. investors with exposure to those regions. But an investor's best bet in such an environment is to "control the controllable," the spokesperson says, through maintaining a diversified portfolio of stocks and bonds with both domestic and international exposure.

Chris Dhanraj, head of U.S. iShares investment strategy at BlackRock, says that historically, activity in exchange-traded funds has risen during periods of heightened geopolitical risk and market uncertainty, with the funds providing a possible source of liquidity and price discovery as events play out. His firm recommends that investors analyze their exposures to local currency risk -- primarily in sterling and the euro -- and consider currency-hedged funds as a viable alternative to minimize downside risk.

Mr. Bartolini says that for diversification ahead of further Brexit-inspired crises, investors should look at gold, which he says has "proven to help during idiosyncratic risk events time and time again." Another possibility, he says, is ETF options, which could provide access to strategies that benefit from an uptick in volatility no matter which direction the market takes.

Just another shock?

Elisabeth Kashner, vice president and director of ETF research at FactSet, advises investors to be prepared for occasional negative shocks in their portfolios by taking on only the level of risk that they can handle financially and emotionally, and by focusing on long-term goals. She cautions investors "to not be your own worst enemy by changing investment strategies midcourse."

The funds are making preparations of their own. State Street offers a range of Tactical Allocation ETF Portfolios, models investors can use to structure their ETF holdings to achieve particular outcomes ("Conservative," "Growth," etc.). Overall, these portfolios are underweight Europe relative to the firm's strategic allocation weights, the baseline it uses to design the models before factoring in events like Brexit.

The Vanguard spokesperson says regardless of the outcome, "We continue to believe the U.K. market will offer positive diversification benefits to investors."

Mr. Cowan is a writer in Northern Ireland. He can be reached at reports@wsj.com.

(END) Dow Jones Newswires

March 03, 2019 22:25 ET (03:25 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.