Amidst economic doomsday predictions from both campaigns, the financial press reporting on the smallest change in the pound as evidence of impending disaster or salvation and companies staking out contentious positions on both sides of the aisle, investors should do one thing before they head to the polls on Thursday — take a deep breath. While the EU Referendum will arguably be the most important vote for a generation, it would be incredibly foolish — small ‘f” — to panic when it comes to your portfolio based on a single political decision.
No cataclysmic threat
First off, if you’re a long term investor who follows the Motley Fool’s maxim to buy quality companies that you plan to own for years or decades, ask yourself if Brexit would change the thesis you had when you bought those shares. Unless the company is an agricultural producer with razor thin margins exporting its entire crop to the EU, that would be harmed by potential tariffs, most publicly traded UK companies wouldn’t face a cataclysmic threat to their business.
This is especially true for the UK’s largest companies, those in the FTSE 100 that likely represent the largest holdings of individual investors. According to the latest figures, FTSE 100 firms only bring in 21.7% of their sales from the UK. Whilst any slowdown following Brexit would undoubtedly harm these numbers, it would be more than offset in the short term by a weaker Pound helping non-EU exports and beneficial foreign currency translations come earnings season.
Of course, small and mid-sized domestically-focused firms will suffer during the months or years of uncertainty that would follow a Brexit vote. This would be particularly true for homebuilders, real estate companies and banks, which would be most vulnerable to a domestic economic slowdown. However, if you own a quality company that you believe will continue to perform well when measured in decades, it makes no sense to sell based on short term factors.
No sense selling
The uncertainty about what would follow a vote to leave is another reason to hold onto shares you plan to own for the long term. No one knows with any certainty what sort of deal would be forged with the EU. It could be the common market access sort that Norway and Switzerland have — although that’s unlikely given their accepting free movement of EU citizens — or it could be closer to a traditional free trade agreement such as the American-led TTIP.
Whether its one of these options, or something in-between, will matter a great deal for all UK companies. But, until that is clear, there’s little reason to sell good companies at what will likely be subdued valuations.
At the end of the day, while Brexit would have massive political and economic ramifications when measured in decades, it makes no sense to sell quality companies with solid business plans, diversified revenue streams and strong competitive advantages in a fit of short term worry.
