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Market Commentary

Opportunities on Brexit

By June 24, 2016No Comments

With Brexit using up most of investors’ brain power it’s worth taking a moment to pause and remember that Brexit isn’t the only game in town. There are other clouds on the horizon. What they are, and the opportunities they present, we consider below.

Brexit is front and centre at the moment. But, in the background, it is worth remembering that:

  • Brexit is far from being the only game in town (though you would think so from the coverage)
  • Sterling has actually been slipping away against the USD since 2014 (most definitely pre Brexit)
  • The US is on the verge of recession
  • Elections and referendums throughout Europe are another part of the larger democratic revolt (Brexit is just one part) one of which will eventually rip apart the EU as currently structuredAnd the slowing of an extraordinarily indebted China is an old but nonetheless significant risk.

And of course in the background are the two BIG drivers of the above – debt and demographics – while the latter cannot be fixed, the former is simply not being addressed.

So, unless you seriously want to gamble on the outcome of the referendum, it is better to focus on persisting trends. For example:

  • the likelihood that sterling will continue to be weak against the dollar for a year or two – partly because the UK has a worrying current account deficit, and partly because the US dollar has safe haven attractions in an uncertain world
  • the rise of the Asian middle classes for many years, creating a huge source of growth and income for UK investors
  • the current valuation attractions of “value” investments vs “growth“…
  • …and the current valuation attractions of Asia and emerging markets
  • the long term outperformance of smaller companies vs alternatives

This ignores the attractions of India, Japanese smaller companies, and even Latin America (although their attractions are implied in many of the foregoing points).

If you currently hold investments – funds or otherwise – rather than worry about Brexit you should consider whether you had a good reason to buy what you hold in the first place. Take the risk of Brexit as a wake-up call where you have tended to be a bit too complacent when selecting investments.

In other words try and look through the fog of the referendum and focus on a tight process for selecting investments in attractive asset classes which have positive longer term attractions.

If you are keeping your powder dry and the vote is REMAIN, I don’t believe there will be much to exploit – after an initial bounce, there will be a settling and a refocus on the other global issues set out above.

If there is a LEAVE vote, there will definitely be more opportunities.

Firstly, as mentioned earlier, sterling will fall sharply. You might catch some of this buying a dollar fund after the vote (e.g. M&G Global Macro Bond) but do remember that currencies move rapidly and you might miss much of that move.

Secondly, and more valuable taking a longer view, is the ability to buy what is already cheap, but which will get cheaper e.g. the “value” focussed funds, such as Schroder Recovery or Schroder Income.

For context, areas of support for FTSE 100 and sterling/USD are 5,000 and 1.10 respectively. These are not predictions – they are just “stating the bleeding obvious” applying an experienced eye, a ruler, and a pencil to a chart. Put another way, if the UK market begins to fall sharply, and sterling falls through 1.40, these are the obvious points where these markets will stop for a breather.


[originally published 17 June 2016]


Dennehy Wealth