Volatile? Yes... but it’s too soon to work out winners and losers
Selling up is almost certainly a mistake – and there may be openings
FROM the moment that Prime Minister David Cameron called the EU referendum back in February, the City began to brace itself for the impact that a vote to leave would have on financial markets.
Most of the ‘experts’ whom Michael Gove scorned during the campaign suggested that Brexit would send sterling crashing against other currencies – and so it has. But the effect on the stock market has been less dramatic than feared.
By the time the market closed on Friday, the FTSE 100 Index was down just 3.15 per cent, while the FTSE 250 Index was down 7.2 per cent. This is because the FTSE 100 includes more companies with business activities around the world. The FTSE 250 is more focused domestically, so its decline reflects concerns about UK economic growth.
Some investors may be tempted to cash in their shares now, fearful that we are heading into a period of depression and economic decline. For long-term investors, however, that would almost certainly be the wrong decision.
First, it is still unclear what will happen. For the moment, the UK is still part of the European Union and prolonged negotiations are needed to work out how we will interact with the EU and other parts of the world. Shares may remain volatile, but it is certainly too soon to take a definitive view on winners and losers.
Second, immediate market reaction is often overdone. That was clear even on Friday. Stocks fell sharply when the market opened but regained some ground that day. There may be more bounce-backs in the coming days and weeks.
Third, the Brexit vote may present opportunities. Sterling weakness, as Midas said last week, can be good for export-focused firms and those paying dividends in US dollars. Hence drugs giants Astra Zeneca and Glaxo Smith Kline, global consumer goods group Unilever and computer chip-maker ARM Holdings saw their shares rise on Friday. British American Tobacco and another tobacco producer Imperial Brands were up too, as was miner Randgold Resources.
Banks, insurers and housebuilders were among the biggest fallers but some market-watchers believe the financial stocks – such as Lloyds Banking Group, Royal Bank of Scotland, Aviva and Prudential – have been oversold. Adventurous investors may want to take a closer look at these.
After the Battle of Waterloo, banker Nathan Rothschild allegedly said: ‘The time to buy is when there is blood on the streets.’ He is said to have made a fortune by following that advice.