By now I’m fairly sure that you’re suffering from Brexit fatigue; I know I am. So I’m going to keep this as short as possible and then, hopefully, avoid the topic for a while.
The initial impact of the vote to leave the EU was, perhaps unsurprisingly, to induce a state of almost blind panic. Of course, that was simply an emotional response; a knee-jerk overreaction that any good student of the markets should have expected.
However, investors have now had one full week to think through the implications of our collective decision to leave the EU, so I think now is a good time to pause and take a look at what the aggregate wisdom of investors has come up with.
The FTSE 100 is up by about 1%
I’m writing this on the afternoon of Thursday 30th June and Google tells me that the FTSE 100 is at 6,388, almost 1% higher than where it stood as the referendum votes were being counted a week ago.
And so it seems that having had some time to reflect, investors are not especially worried about the impact of Brexit on most of the large-cap international stocks which make up a significant portion of the FTSE 100.
The FTSE 250 is down by about 8%
In contrast and as expected by most pundits, the FTSE 250 has fared significantly worse than the FTSE 100.
The obvious reason is that the mid-cap FTSE 250 is much more UK-focused than its large-cap sibling. As a result, any negative impact that Brexit may have on the UK economy will be reflected far more in the FTSE 250 than in the FTSE 100.
In numeric terms the FTSE 250 is down from a pre-Brexit level of 17,334 to 16,014; a total decline of almost 8%.
However, an 8% decline is not exactly a harbinger of doom, and neither was the 13% decline that the FTSE 250 managed briefly last Monday.
If the market had fallen by 50% then there would be something to shout about, but so far? Not so much.
Defensive and commodity sectors see post-Brexit gains
Only six out of 39 sectors are up across the FTSE All-Share. Those sectors are:
- Tobacco (defensive): Up 8%
- Mining (cyclical): Up 6%
- Utilities (defensive): Up 6%
- Oil & Gas Producers (cyclical): Up 4%
- Pharma & Biotech (defensive): Up 3%
- Mobile Telecoms (defensive): Up 2%
My guess is that defensive stocks have gone up in price because they’re less likely to be hurt by a downturn in the UK economy, either because they are defensive or because they are both defensive and make most of their profits overseas.
Cyclical commodity-related stocks may have increased in value because they tend to be very internationally focused, and so again any decline in the UK is less relevant. Also, their products are priced on international markets, so the post-Brexit fall in the value of the pound could increase their profits, at least in Sterling terms.
That’s my guess anyway; such macro-factors are not really my area of expertise.
Perhaps more importantly, I don’t see any sector which has obviously increased in value because of an expected improvement in the UK economy post-Brexit.
Instead, the gains all seem to be in sectors that are best placed to avoid post-Brexit pains.
Banks, real estate, retail and leisure sectors see the biggest post-Brexit losses
Here are the gory details of the sectors which have been hardest hit by the referendum result so far:
- Home Construction: Down 23%
- Banks: Down 21%
- Real Estate: Down 15%
- Construction & Materials: Down 14%
- General Retailers: Down 13%
- Travel & Leisure: Down 13%
These are all cyclical sectors and are more UK-focused than the sectors that have done well, so it is no real surprise to see them hit by an event which – in the eyes of most experts – has increased the chances of a UK recession.
In addition to the usual consequences of a recession (if we get one), Banks could be hard hit as they are major exporters to the EU and, according to some research, “Banks outside the EU, even in Switzerland, get only limited cross-border access [into the EU]”.
The same argument applies to the insurance sector (down 11%) and the financial services sector (also down 11%).
As for construction and real estate, according to those who know far more about the subject than I ever will, the construction industry: “will be profoundly affected by the result of the referendum” because of:
- Wage increases (due to labour shortages)
- More expensive imported raw materials (thanks to the falling value of the pound and new import tariffs)
- Reduced foreign investment (thanks to the UK no longer being a “gateway” to the EU for foreign investors)
A possible recession, higher wages and higher raw material costs are also cited as potential negatives for retailers, including those in the General Retailer sector as well as the many restaurants and similar businesses within the Travel & Leisure sector.
These are uncertain times indeed.
Bargain hunting in a post-Brexit world
As a value investor, I’m bound to say there will be bargains among those stocks that have seen the greatest falls.
I think there will be, and I wouldn’t be in the least bit surprised if I ended up buying a few companies, at bargain valuations, which had been hurt, at least in the short-term, by the Leave vote.
However, as I said recently, diversification is (almost) everything. I will not be jumping whole-heartedly into home builders, banks, airlines or restaurants, even though the share prices of many of these companies have been crushed.
Perhaps a retailer here, a transport company there, but always in moderation.
Selling the Brexit winners
Most investment commentators are talking about what bargains to pick up, but what doesn’t seem to get mentioned (does it ever?) is what potentially overpriced stocks we should be selling.
The obvious candidates are stocks from sectors that were in favour before the referendum and which have become even more popular afterwards, or at least have not suffered very much.
So potential sell candidates could come from popular sectors such as Personal Goods (e.g. Unilever), Beverages (e.g. SABMiller) and Health Care Equipment (e.g Smith & Nephew).
These are defensive and internationally-focused sectors that have been in favour for a long time and whose stocks, in many cases, are trading on lofty valuations.
These sectors were barely hurt by the Leave vote and so, relative to other sectors that have fallen, are trading on even less attractive valuations now than they were before.
Personally, I wouldn’t be at all surprised if I ended up selling some companies whose share prices have increased post-Brexit in order to purchase companies whose share prices have collapsed.
But, as ever, I will be maintaining a balanced and diverse portfolio at all times.