The Brexit vote stunned the world in the summer of 2016. Implications of the decision could be so reaching that most analysts and pundits have only discussed the larger political and economic. Fewer people have discussed the impact that Brexit will have on investors.
After Britain leaves the European Union, investors will need to trade differently. Here are some tips that will help them minimize their risk profile and maximize the ROI of their portfolios.
Change the risk allocation of your portfolio until volatility subsides
Analysts have debated the future impact of Brexit for the past two years. The truth is that even the most seasoned economists can’t predict the outcome. There is simply no precedent for them to lean on, since no country in modern history has left a compact the size of the European Union.
This means that you should hedge your risk. It will be prudent to start moving more of your holdings to securities with low beta coefficients, in case there is a major economic fallout. Regardless of the long-term economic impact, there will probably be sizable volatility after Brexit is finalized. You want to minimize your risk exposure until volatility drops.
You should also evaluate the risk profiles of different investments. Futures and other derivatives might be the preferred assets to invest in in some instances. According to Earn2Trade, you should definitely look into them when allocating your portfolio.
Monitor hedge positions of institutional investors
Institutional investors are particularly cautious about minimizing volatility. This is especially true for pension funds and insurance companies.
These institutional investors are likely to invest heavily in derivatives and indexes that will help them minimize their risk. You will want to pay close attention to these outcomes.
Consider using straddle strategies with pairs of put and call options
There are a lot of different investment strategies during trading activities that you can use with options.
About that, it’s very important to choose a reliable and trusted broker, who allows you to open a demo account for free, where you can experiment and try several strategies. Nowadays, not so many brokers offer you this kind of services.
Now, let’s go back to talk about strategies. One is the straddle investment. This allows you to buy a stock with a put and call option of the same expiration period. You can this option to get a profit whether the value of the stock goes up or down. This is a great option in periods of high volatility when you aren’t sure which direction the asset price will go, but realize that it will probably deviate significantly from its current price.
This will be a good strategy to try just before Brexit. The future volatility will be huge, which will give you a great chance to make money off of it. It will probably work best by the straddle strategy with indices or highly volatile equities, such as tech stocks. Since these trades need to be made quickly, you need to use a reliable trading platform.
Consider reducing your holdings of UK automotive and technology equities
While the net economic impact of the Brexit decision is still unknown, most experts agree on some of the likely outcomes. There will be winners and losers across different industries throughout the UK. Forecasting the industries that will take the biggest hit and those that are likely to benefit the most is key to being a successful trader.
Many industries that depend heavily on exports to other European countries will probably suffer significant losses after Brexit goes into effect. Automotive and technology companies will suffer the most. According to a report by Baker McKenzie, automotive sales to EU countries are expected to fall by 16.5%, while technology company exports are expected to fall 8.8%. This can be bad news if you own stocks in these industries. It is a good idea to take short positions on these investments now and avoid buying them again in the future, unless they prove to be resilient at least a year after Brexit.
Pay a close eye on the price movements and market for basic commodities
The market for agricultural products, energy and other essential commodities is also very uncertain. You will need to pay a close eye on these commodities before investing heavily in them. The AEI says that the impact on these markets will be heavily dependent on the outcome of the trade negotiations. The negotiations could very well go against them, which would mean that it would not be wise to invest in high-risk commodity assets, such as agricultural futures or other derivatives.
Ashis Kumar is a passionate blogger.