THINKING OUT LOUD

My take on the Brexit

Originally written on June 28, 2016

Below is a copy of a note I sent to our clients a couple days following the recent Brexit vote. Incidentally, the world's major indices have risen between 7% & 13% since that vote, 6 weeks ago.

Whether or not the British referendum vote (“Brexit”) to leave the European Union is ratified, re-run, reversed or takes 2 years to be effected, it is creating investing opportunities.

To first believe that there are investment opportunities, one must have a view that assets have been mis-priced, which I do.

On Friday June 24, 2016, the European & U.S. sovereign bond yields have fallen heavily, the British Pound is now trading at 32 year lows, the DAX, CAC, Eurostoxx 50 and the Nikkei equity indices retreated between 6% & 8%, the Italian & Spanish stock markets declined 12% (with Spain having its largest one-day decline in history) and the share prices of some banking stocks have plunged as much as 22%.

Most other major indices including Australia and the U.S. fell 3%, while the Netherlands market fell 6% based on commentary that they may hold their referendum to leave the EU. Interestingly, the UK’s FTSE 100 equity index “only” fell 3%.

In summary, I think there have been overreactions in the pricing of selected assets. The work that I am conducting now is to work out the difference between the market reaction and the probable economic effect on a specific asset of a Brexit occurring.

My strategy is to have watched the markets trade through their Friday session and observe the negative news over the weekend. When coupled with expected downgrading broker research reports, we should see more selling pressure when markets open on Monday. Prices could decline for a few more days afterwards as institutions also use this mayhem to clean up their books as the quarter comes to an end.

Which means that this Wednesday – Friday may prove an attractive time to make some investments, depending on price, of course.

For the record, although I didn’t expect the UK to vote to leave to get up, over the longer-term I think this could advantage the UK.

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