Brexit Frenzy

What to do about #Brexit? If you’ve turned on the television, checked Twitter, or refreshed your Facebook news feed, you’ve been assaulted by Brexit coverage and opinion. Britain’s vote to leave the EU surprised virtually everyone, including a good portion of Brits who voted to bolt. (#Bregret)

For many, this is simply good geopolitical theater that adds fodder to our own circus as it stammers towards the election. For investors and financial professionals, this is more than just a spectator sport. Markets were rocked by the results of the vote like an earthquake with an epicenter in London – reverberating worldwide.

There is great debate about the short-term political ramifications of the London-Brussels divorce, but longer term, we’re much more concerned about the potential economic fallout – which, honestly, no one has their arms around at this point. It’s not difficult to act in situations like these, but it is hard to take meaningful and informed action with so little clarity. Sometimes not reacting is the best strategy.

Although the negative impact on stocks was swift and severe, most would agree that the action has been orderly. Stocks are being hit globally as they are whenever a widely unpredicted and significant event creates worry and uncertainty. The British pound has lost significant value, which makes some sense (yes, the UK maintained its own currency and central bank while being part of the European Union, so it has always had one foot out so to speak). Again, all very entertaining, but what does it mean for investors? What should we do?

Right now, nothing. Keep in mind that even after Friday’s (and now today’s) sizable selloffs, US market indexes have simply round-tripped to levels that we saw two weeks ago. Stocks are still comfortably above the last panicky levels seen when oil bottomed in the $20s.

No one knows the degree to which Brexit actually reduces the value of the companies we own or if it does at all longer term. The main issue now is the impact on the European banks, which were not repaired to the extent US banks were after the last banking crisis.

RBS (Royal Bank of Scotland), Barclays, Deutsche Bank, HSBC, et al will be front and center for a while. Markets are terrific at assuming the worst (when surprised) then climbing the “wall of worry” as uncertainties are resolved. This takes time, and it probably won’t start until we’re all just as sick of hearing about Spexit, Frexit, and Czexit as we are of Grexit and now Brexit. Also, be prepared for plenty of talk about bank bailouts across Europe.

Keep in mind that since the stock market nadir in 2009, stocks have dipped and rallied from numerous shocks:

  • BP/Macondo Well Oil Spill Gulf of Mexico (2010)
  • Flash Crash (2010)
  • US Debt Downgrade (2011)
  • Fiscal Cliff (2012)
  • Grexit (2012–2015)
  • Oil Price Collapse (2014-2015)
  • Brexit (2016)

Here’s how stocks performed during this period of multiple at-the-time-calamitous events:

Brexit Chart

We don’t think our stocks are necessarily worth any less now than they were on Thursday. We’re constantly analyzing the companies behind the stocks for potential tangible fallout from all shifts in operating environments (including those altered by political decisions). It’s unclear what Brexit means for the US elections, the global economy, and specific companies and their stocks. So what do we do about Brexit? We can write about it, but from an investment standpoint, there is nothing extraordinary to do. We’ll simply continue to look for opportunities.