“Brexit is particularly hard to trade due to its highly politicised nature,” says Ken Peng, head of Asia investment strategy at Citi Private Bank. “Moreover, there are significant odds for all three scenarios: no deal, deal and no Brexit. As such, we advise our clients to hedge existing positions, but try not to punt on a political result. That said, a no-deal outcome is likely to take sterling back to the lows seen just after the June 2016 vote.”

As Peng points out, the outcome of ongoing political negotiations over the UK’s future relationship with the EU remains unclear. What is clear is that in the face of the uncertainty, banks and other financial companies have already shifted assets worth at least £800 billion (more than HK$8.2 trillion) out of the UK and into the EU, according to EY.

Meanwhile, investors withdrew £7.8 billion (HK$80 billion) from UK equity funds between April 2017 and the end of 2018, according to data from Bank of America Merrill Lynch. What’s more, business investment has fallen dramatically as companies put plans on hold because of the uncertainty. Major manufacturers, including Airbus and Siemens, have warned that they may have to quit the UK if there’s a no-deal Brexit.

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“Given the uncertainty at play, we do not advocate taking strong directional positions on UK assets at this moment,” says Philip Wyatt, Asia-Pacific economist at UBS Global Wealth Management. “We believe investors outside the UK and the eurozone should resist the temptation to bargain-hunt.

Investors withdrew £7.8 billion (HK$80 billion) from UK equity funds between April 2017 and the end of 2018, according to data from Bank of America Merrill Lynch

Wyatt also advises investors to gain exposure to the dividend strategy, which has shown to consistently outperform the overall Hong Kong equity market under different market environments. “In light of our house view expecting the US to hike rates for one more round in 2019 and to hold rates in 2020,” he says, “we expect it will draw more client interest onto companies delivering resilient yields.”

US-China Trade War

While investors face an uncertain future regarding Brexit, US President Donald Trump’s trade war with Mainland China has added to their anxieties. Tit-for-tat tariffs between the two countries, slowing economic growth, corporate defaults, and risks from Mainland China’s internal debt have all had negative effects on investor sentiment.

Indeed, as trade tensions intensified in 2018, the Shanghai Composite Index and the Shenzhen Composite Index tumbled 24.6 per cent and 33.2 per cent, respectively, as stated in a research paper published by the Hong Kong Securities and Futures Commission in late January.

And Mainland China is likely to face more challenges down the line. The trade talks have yet to resolve key sticking points such as the protection of US intellectual property, eliminating subsidies for favoured Chinese companies, and the forced transfer of US technology, all of which are highly unlikely to be resolved in the short term.

As trade tensions intensified in 2018, the Shanghai Composite Index and the Shenzhen Composite Index tumbled 24.6 per cent and 33.2 per cent, respectively, according to the Hong Kong Securities and Futures Commission

Despite market conditions becoming more uncertain and the likelihood of further economic damage being caused by the trade war, savvy investors should do more than just hope for a ceasefire; they should take an active role in managing their portfolio.

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“The escalating threats of tariffs on increasing amounts of traded goods may lead to higher prices, a weakening US dollar, lowering profitability of companies and slower economic growth,” says Johnny Hon, founder and chairman of the Global Group. “It will be more important than ever for investors to be positioned into assets that help manage volatility, such as broad diversification across equities and other alternatives, including property and absolute return funds with lower correlation to equity markets.”

Indeed, as Hon advises, shrewd investors should stay in the game while mitigating risk. “Diversification is the most important portfolio quality in an environment of elevated volatility,” says Citi’s Peng. “Our key call is to ‘Go Global.’ Many investors believe staying in home markets is prudent, but that often increases concentration risk. We believe a global balanced portfolio is best placed to weather turbulent markets.”

To achieve that balance, Peng advises investors to adopt a “barbell” approach to investing, i.e., retaining a core portfolio in stable income-oriented assets with a tactical exposure to selected growth opportunities.

“We see short-duration investmentgrade USD-denominated bonds as the main building block to keep portfolio volatility contained,” says Peng, while further highlighting the importance of income in this environment where dividend and bond yields both offer competitive returns.

Peng also sees the current market as a good time to increase exposure to unstoppable trends of growth, including Asian consumption, digital disruption and increasing longevity. “We recommend building a portfolio of quality companies or funds with proven expertise in industries such as AI, robotics, smart appliances, healthcare, leisure, insurance and branded consumer products.

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