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Canny investors know there’s life beyond Brexit

Ed Monk

Ed Monk - Fidelity Personal Investing

There’s no doubt what UK investors will be reading most about this week.

Brexit developments will be reported in minute detail, with events changing several times on the same day and stories becoming out of date before they’ve had a chance to get their boots on. Many of these stories will include the reaction of financial markets as some kind of barometer for the political events taking place.

Canny investors know there’s life beyond Brexit

Some of this will be valid - the level of the pound has been influenced by Brexit news in the period since the referendum - but most will not be.

Big swings in global markets over the past few days are a case in point. Asian markets have started the week on the back foot with falls of around 2%, following a sharp drop for the S&P 500 last week. The FTSE 100 this morning has so far bucked the trend, and is level.

These markets are not, believe it or not, being driven by Brexit but by much broader issues about global growth. In particular they are worried that world economic activity may have peaked for now, prompted by an apparent pivot by the US Federal Reserve - the central bank - from a ‘hawkish’ stance to a more ‘doveish’ one. The Fed has communicated to markets that interest rate rises have become less likely because it does not want to take any steam out of the economy, and markets have now become worried that the Fed has reason to think the dominant US is about to slow down.

In other words, exactly the sorts of thing that markets always worry about. These are not extraordinary events - this is what it’s always like. We can become too influenced by negative headlines which make us think disaster is around the corner - it seldom is. If the current level of market volatile feels a bit much for you, you probably shouldn’t be invested at all.

Seasoned investors know that volatility is the price they pay for the chance of the higher long-term returns that equity markets have historically delivered over cash, and they stand ready to take advantage of it.

It’s natural to feel uneasy when investments fall in value. We’re programmed to be risk averse and to fear losses more than we value gains. Yet, when it comes to investing, that’s a recipe for failure. It is by selling investments after they have lost value that those losses are crystallised. Staying invested can give assets the chance to recover, and it’s noteworthy how often they do just that.

As the end of the tax year approaches, this is the time investors wonder whether they should use up the ISA allowance by investing in stock markets, and how to do it. Many ordinary investors seek out the comfort of dividends as a buffer against market swings, and equity income funds are a popular way to do this. Right now the FTSE 100 is yielding more than 4%. That’s based on the dividends forecast to materialise this year. If they do come as planned, that’s a decent buffer against short-term falls.

Our Select 50 list of preferred funds offers a good range of equity income funds that have a specific mandate to seek out reliable dividends.

The Fidelity Enhanced Income Fund builds on the underlying dividend offered by its already high-yielding shares by selling the option to buy some of its shares to other investors. The premium it earns by doing this results in a yield of more than 7.1% currently, although this is not guaranteed.

The JOHCM UK Equity Income Fund. This currently offers a yield of more than 4.7%, although also not guaranteed.

It’s not all about the UK - in overseas markets, the Fidelity Global Dividend Fund has holdings in Asia, Europe and the US with a particular focus on reducing downside price risk.

Important information

The value of investments and the income from them can go down as well as up, so you may not get back what you invest. The Select 50 is not a recommendation to buy or sell a fund. Overseas investments will be affected by movements in currency exchange rates. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.