Brexit and the Impact it will have on Investors

brexit

30 Jun Brexit and the Impact it will have on Investors

Unless you have been living in a cave the past week, it would have been almost impossible not to have read or heard about Britain’s referendum on exiting the European Union.

A week ago, on the 23rd of June, 51.9 percent of eligible voters from the UK sent shockwaves around the world by opting to leave the EU. In doing so, they have kicked started a multi-year process to remove themselves from the Union they have belonged to for the past 43 years.

The implications of a British exit are many. Politically the vote has accentuated the divide between Scotland, Northern Ireland, Wales and England, with the former especially pushing to remain. Leaving the EU might see population policies changing, with reducing the number of immigrants a foremost concern in many voters minds.

Economically, leaving the EU could require the UK to give up free trade benefits with member countries in the Union. The mechanism behind how this will work is still unclear, but the general consensus is that there will be a significant impact on the British economy. Credit agencies have fallen over themselves to downgrade the UK’s credit rating.

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While it may be years or even decades before the entire impact of Brexit will be fully felt, the financial markets reacted immediately. Investors reacted by selling out and the FTSE closed 8.7 percent lower last Friday. American and European markets also saw strong selling. The pound plunged, gold surged and oil retreated. Closer to home, the STI gave up a couple of percentage points to close at 2735.

A lot has been written about how Brexit will affect investors worldwide. Today I want to play the devil’s advocate and give you three reasons why and how this entire Brexit issue is overblown and that it will actually not have that big an impact on local investors at all.

Buy on Rumours, Sell on News

When Brexit was announced, many people started asking – What should we do next? Is it time to load up on gold? Shall we buy the pound? What are the stocks that will benefit from Brexit? What are the ones that we should be shorting?

Everyone wanted to be an ‘investor’ overnight. Family and friends who have paid little interest to investing started exploring their options. Suddenly an opportunity presents for them to make a call on an uncertain market. They smell a chance to make a quick buck.

Unfortunately that is not how financial markets work. By the time the news is out in the streets, it is already too late. Fortunes would already have been made or lost. If you want to be a global macro investor and you depend on CNN reporting on past events to get your trade ideas, you are merely fodder for the big boys.

Global events like Brexit is captivating because news outlets make them out to be. They brighten up an otherwise slow news Friday. They give everyone something to hang on to. They give aspiring investors hope.

For the many who shared with so much conviction during the announcement their views on the direction of the pound/yen/gold/stock market, I wish them well.

Having said that, my guess is that much of their enthusiasm will fade together as Brexit gets further and further removed from the news. In that sense, the real impact remains minimal.

Singapore and the UK – Win Some Lose Some

Granted, Singapore and the UK share many historical ties. We have imported our judicial, political and even education system from the UK. We send our brightest to the best universities in the UK. Many British countries have regional headquarters in Singapore. However, as an economy, Singapore’s dependence on the UK remains contained.

Trade with the UK has been on a steady decline over the years. In 2015, they occupy the 22nd spot, accounting for less than 2% of the Singapore’s total trade.

There are of course local companies with greater exposure to the UK than others. They include ComfortDelGro, Ho Bee Land, City Developments, Sembcorp Industries and Ascott Residences.

Up to a quarter of ComfortDelGro’s revenue is derived from Britain and Ireland. CDL has 11% of its assets in Britain. With the pound at its lowest level in 30 years, these companies will be at the losing end of currency conversions and the immediate impact on their numbers will be felt.

Ascott Residences on the other hand is hoping that the attractive pound will bring more leisure travellers to their UK properties. Fire protection equipment dealer Hart Technologies might also stand to gain from the sharp drop as their imports from the UK becomes more affordable.

In the short run, the STI has recovered slightly from the initial sell off as investors realise that their panic was unfounded. Over the longer term, the British exit will negatively impact some local companies, just as it will present opportunities for others. The ones that do not react accordingly will falter while those that adapt well will continue to prosper.

The overall impact for retail investors might or might not be a negative one – it is far too early to tell.

The question then in everyones’ mind is – Should I be selling the Ho Bee/CDL/ComfortDelGro stocks that I own? Which are the stocks that I should be looking at to buy now?

That leads me to my last point.

Investing in Stories vs Strategies in Investing

magic open book of fantasy stories
It is very easy and fun to invest in Stories. Brexit is such a story. The potential slowdown in China is a story. Trump’s candidacy is another. Frontier markets such as Myanmar is full of exciting stories. Closer to home, the Iskandar Development Region makes for a very compelling story.

I am not saying it is wrong to invest in stories. Stories are where opportunities abound and where fortunes are made. But investing in stories requires a high level of involvement, it requires a huge amount of working knowledge and also relentless effort. One has to keep on top of the news, review, analyse and understand and then make investing decisions based on how the situation is unfolding.

A strategy on the other does the exact opposite. A strategy is agnostic to stories. It regards them as noise. A strategy is hardwired and does not change no matter what is happening in the world.

Here is an example. An investor has a strategy to buy high yielding dividend stocks. In times of boom or bust there will always be stocks paying out dividends. The buying and selling becomes very simple. Good dividends – buy. Bad or no more dividends – sell.

I am oversimplifying but my point is there must be a framework for investors to base their decisions on. Be it yield, earnings, assets or a combination of them all.

Use your own strategy to evaluate the Ho Bee/CDL/ComfortDelGro counters that you own. If the reason why you bought them in the first place remains unchanged,  disregard the noise and keep them safe. If they no longer fit within your strategy, dump them without a second thought. With a strategy, your job as an investor becomes many times easier.

So, do you invest in stories or does your strategy invest for you?

In Conclusion

As Britain struggle to make sense of what they have done and the impact it would have on themselves and the world, investors would do well to keep themselves planted and not get carried away. Brexit will not bring about a massive windfall. Neither is it the end of the world. It will just come and go.

(At the time of publication, the STI and FTSE have recovered to pre Brexit levels.)

image:telegraph.co.uk, yips.org



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