So it’s Brexit. What next for shares?
By Owain Bennallack - Friday, 24 June, 2016
However much you hanker for the good old days when Britain was an island walloping the French in the 100-odd years war or when the Anglo-Saxons were being beaten up by the Vikings 500 years before that, it’s at moments like these when you should thank your lucky stars that you live in a Western democracy in the 21st Century
Particularly if you’re a politician.
Because even as disbelief mounted at the incoming weight of votes in favour of leaving the European Union on Thursday night, we also saw the blaming and recriminations get under way.
You know the kind of thing: this leader was too soft on this, that campaigner was too hard on that, and the other was purely reckless…
But while the decision to leave the EU has taken uncertainty to levels not seen since the financial crisis, this will surely be a bloodless coup.
That’s not insignificant, given what’s just occurred.
What we have here is a populist uprising, and it has confounded the global elites, who almost to a man, woman, business, trade organisation and international body urged Britons to vote Remain.
1,000 years ago, there would be rioting in the streets and heads hanging from London Bridge as the winners became clear.
In 2016 we ‘merely’ get the resignation of the Prime Minister, unprecedented volatility in value of the UK pound as it fell against the dollar, major London-listed banks opening for trade priced 30% lower than where they closed the afternoon before – and arguably even more questions to be answered than before the vote began.
What about shares?
Most people didn’t see this coming. The polls were close but favoured Remain. The bookies were solidly for the status quo throughout.
And the wild movement in global stock markets and currencies is the ultimate signal that so many were wrong-footed.
But the past is yesterday’s fish and chips wrapping for investors. No point crying over what we could or should have done.
Our financial futures depend on what happens in the days, months and years ahead – and how we respond to the potentially terrifying swings in the value of our ISAs, our pensions, and probably soon enough our house prices.
I obviously don’t have all the answers to this. But here are three things I suggest Foolish investors keep in mind this Friday.
1) Don’t panic
So you knew a Motley Fool writer was going to tell you that.
However, I’m not glibly saying it because I think there’s nothing to worry about. On the contrary, my hunch is that – from an economic perspective – the vote is a terrible short- and long-term outcome.
You may have a different view. Polling suggests older, richer citizens were more inclined to Brexit, so perhaps I’m writing to a large constituent of readers who got the result they want today. I won’t presume.
But wherever you stand politically, you will still see the same frightening blanket coverage of turmoil in the financial markets, and famous companies priced down 20% or more.
I don’t say to keep calm, not because nothing has changed – it has – but because rash responses are unlikely to be the best responses.
The turmoil in the markets may be a taste of worse to come, or it may prove to be a great buying opportunity.
But what will be important to your wealth in 10 years’ time is not how you traded on some by-then long-forgotten Friday morning – even a morning as momentous as this – but how you steadfastly and consistently implemented your investing strategy through good times and bad.
If you tend to trade, look judiciously for real opportunities. Don’t be spooked by swingeing prices.
If you buy and hold for the long term, consider when and how you will put new money to work, despite your nervousness.
The political picture has changed but your investing goals haven’t.
2) Remember currencies
I made this point several times in the lead up to the vote: purely from an accounting perspective, a Brexit is not necessarily bad news for the UK stock market.
That’s because UK companies earn around three-quarters of their money from overseas.
To a large extent, this insulates their earnings from domestic troubles such as any Brexit-provoked recession (although Europe could well be dragged down with us in that scenario).
It also has an immediately helpful consequence in currency terms, particularly versus the dollar.
Companies that earn their money in dollars are going to find those dollars worth a lot more following the devaluation of our currency.
This is one reason why the FTSE 100 as I write has fallen less steeply than, for instance, the European markets – despite some major FTSE constituents having fallen 20% or more.
Even if they earn less, the market knows those earnings will be worth more once brought back home.
3) Beware British exposure
This is the flipside of the comfort of owning overseas exposure.
In my last Collective, I suggested how a confident Brexiteer who really believed there’d be no real economic impact from a decision to vote Leave could invest with a view to profiting from their sanguinity.
I pointed out they could buy British-focused shares such as commercial property companies, homebuilders, UK banks and so on.
But as I’ve said above, I personally judge there could be a financial shock from this decision to leave the EU, and possibly quite a big one.
In my view, then, many of the shares that a nonchalant Brexiteer might have seen as a good buy may in reality get a hammering, even from their depressed levels.
Now, you need to be selective. A small British-based company might still be a winner if it exports a lot of goods and services overseas.
Indeed, the Leave side has predicted a boom for these businesses as red tape is rolled back and new trade deals are struck.
Well, we’ll see about that, but at the least there’s the currency benefit.
However, UK-based companies tied directly to UK consumers and the British economy will have nowhere to hide.
If the worst predictions are true, then today’s falls could just be the shape of things to come.
Again, you don’t want to panic – many such companies are down 15-25% as I speak, which could arguably make some of them ‘buys’.
But there’s no substitute for understanding businesses and their operations and balance sheets, sorting out the strong from the weak, and trying to invest in the companies that can ultimately prosper however our country moves forward.
Investing for tomorrow
Britain is the fifth-largest economy in the world, and we’re a nation of diverse, creative and productive people.
We pay our taxes and we follow the rule of law.
I’m not expecting anyone to turn off the TV and whistle a happy tune on account of my views, but for what it’s worth, even as I mourn the referendum result personally, I believe we will survive the aftermath.
The same is true of the markets. They have seen worse and survived.
Things look turbulent now, but one day we’ll be back to worrying about maximising our ISA allowances and earning an extra 0.25% in interest on our savings.
Heck, even the Vikings stopped invading eventually. We even made our peace with France.
For now there’s nothing to do but to take a deep breath, grin and bear it – and to keep focused on your long-term investing goals.
Remain focused on the long term
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However much you hanker for the good old days when Britain was an island walloping the French in the 100-odd years war or when the Anglo-Saxons were being beaten up by the Vikings 500 years before that, it’s at moments like these when you should thank your lucky stars that you live in a Western democracy in the 21st Century Particularly if you’re a politician. Because even as disbelief mounted at the incoming weight of votes in favour of leaving the European Union on Thursday night, we also saw the blaming and recriminations get under way. …