With less than a year to go before the UK is set to leave the EU, Andrew Aldridge considers the pros and cons of investing in smaller domestic companies now or waiting until the economic outlook is clearer.

As we head towards the UK leaving the European Union (EU), there continues to be much discussion about what the UK economy will resemble in the second quarter of 2019 and beyond – and, by extension, whether people should be investing now or holding onto their money until the exit process is formalised and the outlook is clearer.

In March last year, the Prime Minister invoked Article 50 and fired the starting gun on our formal negotiations for the UK to leave the EU. We are now less than a year away from the completion of that ‘formal process’ and, in March 2019, it is anticipated we will make that transition.

A lot is likely to happen before then and, as such, nobody can truly say what the situation will be, what deal may or may not have been agreed, and what transition period will be in place. All we might say is that, under the current Government – and it seems steadfast in its belief no further votes will be put to the public – the negotiations will be done and the timetable for leaving is not likely to change.

Less than 12 months away from the exit then, it is perhaps no wonder there is a sense of intrigue, and possible apprehension, around the outcome – both with regard to how financial services will deal with the changes specifically, and also what it will mean for the wider economy.

Both are questions that, again, appear impossible to answer at present but, in terms of investors and their attitude to the post-Brexit world, it was interesting to read the survey results recently released by the Enterprise Investment Scheme Association.

This “nationally representative survey of 2,004 respondents”, with varying degrees of investable assets between £0 and £100,000, asked how the Brexit negotiations were affecting their sentiment and how confident – or otherwise – they might be about SME investment opportunities post-Brexit.

Interestingly, despite some of the media mood music around the post-Brexit environment, 29% said they felt Brexit would strengthen SME productivity, with – of particular relevance to the Enterprise Investment Scheme (EIS) sector – 28% feeling “knowledge intensive companies such as those in the energy-tech, med-tech and fin-tech arenas will benefit as a result of Britain formally exiting the EU”. Finally, 18% said they felt they would be “presented with a higher frequency of SME investments after Brexit”.

The survey also highlighted what we perhaps already know, which is investors are now more inclined to hold a ‘wait and see’ position when it comes to investments in the post-Brexit world. Extrapolated out, the results would mean four million investors in this country are holding back money until the UK formally leaves the EU next March. In London, for example, one in four are deliberately holding back money, while a similar proportion of affluent investors said they do feel encouraged to invest in SMEs once we’re out of the UK.

For advisers active in this sector, this presents an interesting conundrum because, clearly, waiting 12 months until Brexit is formalised means opportunities can be lost and potential growth opportunities could be missed.

If an investment manager deploys funds regularly – and all EIS funds raised in 2017/18 by Deepbridge, for example, were deployed in 2017/18 – then all well and good. With some managers taking up to two years to deploy funds, however, this could leave investors seriously behind the curve and investing into an economic environment that would be truly unknown.

Reassure Clients
In that sense, it is important advisers acknowledge the uncertainty Brexit brings – how could you not when the debate is so all-encompassing? – but also look to reassure clients by investing in experienced, specialist managers who have the necessary skill-set and are regularly investing in those ‘knowledge intensive’ companies that have the potential for genuine long-term growth.

There also needs to be an understanding, however, that to wait until Brexit is formally concluded may mean not making the most of that investment and any potential tax reliefs, and as mentioned, missing out on opportunities.

A matter of 10 or so months to Brexit is not a long time but, in an investment sense – and particularly in the EIS sector – it can make a lot of difference. To sit on cash for the duration might seem like a good idea but, let’s be honest, when it comes to Brexit, the ‘new normal’ for the UK economy might not be visible for many years to come. As such, a ‘wait and see’ approach may well not be appropriate – and especially if the Brexit optimists do turn out to be right.

Andrew Aldridge is partner, head of marketing at Deepbridge Capital.

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Source: Professional Adviser



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