Download IOOF Investments BREXIT – tea break or earthquake?

IOOF Investments
27 June 2016
BREXIT – tea break or earthquake?
Is this a buying opportunity in markets or is it a time to go to cash?
Certain sectors such as banking/financial
stocks were hit hard whilst other stocks,
which could be beneficiaries of a weaker
pound, fared better. Also gold stocks
rallied as gold went higher, whilst the
pound and euro dropped – in the case
of the pound to a 30 year low against
the US$. Bonds rallied – with 10 year US
treasuries rallying to 1.5%. With the risk
of off-trade occurring, the Australian
dollar also dropped around 2 cents
against the US$.
There will always be geopolitical events
in markets and the above shows the
importance of diversification in creating
portfolios and managing assets.
In the past geopolitical events like
this have been a buying opportunity
– if this is a correction in a bull market –
and there have been 12 plus corrections
since the GFC. Due to the GFC and the
monetary stimulus by central banks it
could be said that asset markets are at
elevated levels – thus they are in a more
precarious position now.
BREXIT does create a lot of uncertainty
and in particular noise by economic and
political commentators – and markets
hate uncertainty. Further, are there
follow on events such as the break-up
of the United Kingdom if Scotland leaves
or other countries seeking exit from the
EU, currency instability and so on.
To counter the above arguments it
can be said that there will be a policy
response by authorities (as in the past)
which will tend to lower interest rates and
raise system-wide liquidity – though we
are coming to the natural limits of some
of these policies. Second, whilst the UK
is important (5th largest economy) in the
scheme of the world wide economy, the
United States, China, Japan, Germany are
much more important.
Third, with the UK itself, a weaker
pound will help export industries and
boost economic activity. It should
be remembered that there are many
countries outside the EU who prosper.
Further, countries such as Switzerland
and the Scandinavian countries have
negotiated individual deals with the EU
and still do well. It will also free up the UK
to do deals with other countries outside
the EU and because the UK runs a deficit
with the EU, most, if not all EU countries,
will still want to deal with the UK.
So if UK markets get hit too hard as a
result of BREXIT, it probably is a buying
opportunity. London and England have
a number of comparative advantages
that are hard to replicate in the rest
of Europe (as reflected by the inward
migration into the UK).
In a situation such as BREXIT – (and
there will always be geopolitical events
and shocks to the system – it is the
nature and inherent to capitalism) then
I suggest investors go back to first
principles. In terms of stocks – if good
quality stocks that have little to do
with BREXIT are hit then it is probably
a buying opportunity – because the
longer term prices will be decided by
earnings, yield, cash flow and other
fundamentals. If anything the search for
yield will increase – especially as official
interest rates are forced down further.
Also it should be remembered that
markets often tend to overshoot – both
on the upside and downside. There
will also be opportunities in currency
markets and regions as we see big
movements in currencies and hence
the price we pay for a whole country’s
assets. In other areas such as bonds and
the issuance of debt – well maybe the
bubble just gets bigger and bigger.
Commentators such as Alan Kohler
say this is just another good buying
opportunity, whilst others say that this
is just the start of something larger with
greater knock on effects and continued
uncertainty.
In the end analysis BREXIT has shown
the benefit of being diversified, having
sufficient cash levels to take advantage
of opportunities and how the experts
can get it wrong!
By Steve Merlicek
IOOF, Chief Investment Officer
Data source: Bloomberg
The document is for financial adviser use only and should not be distributed to clients. The document does not take into account any client’s objectives, financial situation or
investment needs. The information in this document has been prepared on behalf of IOOF investment Management Limited (IIML) ABN 53 006 695 021 AFSL no. 230524 and
is based on information that is believed to be accurate and reliable at the time of publication.
IIML is a company within the IOOF Group which consists of IOOF Holdings Ltd ABN 49 100 103 722 and its related bodies corporate.
Past performance is not a reliable indicator of future performance.
INV-1032
Firstly, all the so called experts – the
political and business elite and even
the bookmakers got it wrong. As such
markets ran up and rallied ahead of the
vote, such that even with the declines
after the vote some markets were about
even for the week.