WHAT BREXIT TAUGHT INVESTORS
The U.K.’s surprise Brexit vote has taken investors on a weeklong roller-coaster ride of historic proportions. It began with a steep sell-off that shed a record US$2 trillion from global stocks in a single day, followed by a surprising and substantial reb
BANKS ARE NOT EQUAL
The U.K. banking sector got clobbered amid a widespread sell-off in global financial stocks, but some fared worse than others. A whopping 13 banks included in the pan-European Stoxx 600 Index plunged more than 20 per cent, with U.K.-based names such as Royal Bank of Scotland and Lloyds among the hardest hit. For Lloyds, the rationale was clear, as the vast majority of its business is focused in Britain. As for RBS, it faces additional risks such as restructuring charges associated with Scottish assets. Banks like HSBC Holdings have held up far better, as an estimated two-thirds of its assets are outside the U.K. and Europe.
KEEP YOUR POWDER DRY
Brexit worries exited the market just as quickly as they entered following the June 23 vote, proving patient investors willing to buy the dips can be rewarded handsomely. The rather quick rebound in both U.K. and global stocks also demonstrates that plenty of cash remains on the sidelines, ready to be used when good opportunities emerge. And more could be coming. “This is still a market being pushed and pulled by 'event risk,' and once Brexit is behind us, we will have the U.S. election in November,” said David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates. He suggested investors use the recent rally to cleanse portfolios, reduce beta, and move up the quality curve in all asset classes.
DEFENSIVE STOCKS WIN
Some of the best-performing U.K. stocks have been those of companies that benefit from a weak pound, and are viewed as relatively more immune to economic turbulence. British American Tobacco is a prime example. With the majority of its sales in emerging markets, weak currencies there have acted as a major headwind in recent years. But the falling pound will make that earnings-related currency conversion much more attractive, and the stock is up more than 10 per cent since the vote. U.K. precious metals miners also fared well amid the market turmoil, both due to the currency moves and strength in gold prices. Acacia Mining climbed about 30 per cent.
BORDERS MATTER
Not all stock markets in Europe were equally hit. The biggest sell-offs occurred in the countries that had the most to lose in the event of an exit. With nearly half of trade going to the United Kingdom, Ireland was one of the hardest hit, with equities there falling 13 per cent in two days. Spain saw its stock market plunge as well — the country's Catalonia region has an active independence movement and investors naturally feared calls for separation there could be reignited. Citi warned that the disparate reaction in Europe shows investors are well aware of the threats separatist movements pose to stability. “Populism, especially as it manifests itself in the pushback against globalization, immigration and the political elites, can be found on both sides of the Atlantic,” Citi analysts said.
IT’S GOOD TO BE IN CANADA
While most global stock markets sold off after the Brexit, including Canada, the S&P/TSX fared better than most. Frances Donald, senior economist at Manulife Asset Management, notes Canadian stocks are slightly less exposed to Britain than most other Western markets. While the S&P 500 fell 3.1 per cent during intra-day trading the day of the Brexit, the TSX dipped only 1.5 per cent. “Less than three per cent of the S&P/TSX company revenue is derived from the U.K.,” she said. The TSX also got a lift from the large presence of gold stocks.
RELIABLE SAFE HAVENS
Gold was already having a good run in 2016, and the increased economic uncertainty generated by the U.K. vote only fuelled more demand for the precious metal. It approached its highest level in two years, and is poised to have its best first half in more than 35 years, according to Bloomberg. Similarly, safe haven currencies like the U.S. dollar and Japanese yen rallied as investors exited other asset classes. Despite the relative calm in recent days, there is still more upside expected for the greenback, particularly against the British pound, which dipped as much as 11 per cent to a 31-year low. Scotiabank's chief currency strategist, Shaun Osborne, thinks a drop in the GBP/USD to near par might be in the cards, if history and charts are a reliable guide.
BOND RALLY NEVER DIES
Once again, the world became just a little more uncertain for investors. And once again, they flooded to the safety of the world's AAA-rated bonds. From Tokyo to New York City to Zurich, capital flows poured straight into sovereign bonds offered by the world's most stable nations. Analysts at Citi noted the auction for 30-year U.S. Treasuries before the Brexit netted significant foreign interest. “The post-Brexit flight to quality has the potential to accelerate this dynamic, not only by increasing demand for U.S. Treasuries directly, but also by pushing other sovereign yields even lower, making U.S. Treasuries attractive by comparison.”
IT’S ALL CONNECTED
Sure, some markets fared better than others, but every global stock market found itself in the red — with the exception of Zambia, the only index that was spared red ink last Friday, mainly because of the low liquidity (trades are few and far between) and little exposure to the world's economy. But don't rush to divert some of your money to the landlocked African country. Fund managers said the post-Brexit sell-off is a reminder that this late in the economic cycle, volatility tends to ramp up — and investors have to be ready to stomach it.