The world is changing fast and to keep up you need local knowledge with global context.
The world woke up to a United Kingdom-less Europe, which triggered a mass global asset sell-off. Prior to the vote, Credo’s Deon Gouws lead the discussion with his heart on his sleeve. He swung from Remain to Confused and back again. And while he was just as surprised as the markets with outcome, if one takes a long term view, the sun will shine again, and is urging investors to remain calm. And let’s not forget that Mr Market is very temperamental, and when there’s blood on the street, Buffett says buy. For this will too pass. – Stuart Lowman
by Deon Gouws*
The much-anticipated UK referendum has come and gone, and it is fair to say that the outcome has taken most commentators by surprise (ourselves included).
This has already resulted in extreme financial market volatility, not only in the UK itself, but around the world. Equities across the board are down materially and, earlier this morning, touched a 30 year low.
From an investment point of view, perspective is required. Dislocations such as this happen from time to time, and those with long enough memories will agree that markets tend to over-react in such situations.
We have always been of the belief that a potential Brexit (and all the speculation and mixed messages from a variety of politicians in this regard) largely boils down to the kind of “noise” that we choose not to focus on when investing client portfolios. We acknowledge that money could have been made by those who take a short term trading view, were able to call the outcome of the referendum correctly, and positioned their portfolios accordingly (in terms of currency exposures, specific company investments etc.) – but that is simply not our philosophy.
What makes more sense, in our view, is that one should have a longer term focus and invest in good quality businesses that you understand and that you’re able to buy at reasonable valuations. As we see it, very little if any of this is likely to be affected materially by the outcome of the referendum (that is if one ignores the shorter term noise referred to above): businesses such as the ones referred to should continue to trade well, grow their profits and potentially enjoy multiple expansion over time.
Or, as Cullen Roche from Orcam Financial Group was quoted as saying last night: “If Brexit matters to your portfolio then you’re doing it wrong. Really wrong.” Personally, I could not agree more.
Markets are discounting mechanisms, but what variables to discount in times of such uncertainty? Bear in mind that the actual consequences of a Brexit decision will not be obvious for at least a couple of years (in terms of Clause 50 of the Lisbon Treaty, the UK will have no less than 2 years to negotiate the terms of a prospective exit from the EU).
Put differently, I would suggest that today’s weakness is largely a function of all the uncertainty related to the situation, rather than being reflective of any specific fundamentals which have necessarily deteriorated overnight.
As far as longer term economic prospects for the UK post-Brexit are concerned, it should be borne in mind that there is indeed a strong argument that the country (and therefore many of its companies) will be better off once the dust has settled. This is also partly why it was so difficult for some of us to decide exactly how to deploy our vote (I am personally on record as having been in the confused camp until only a few days ago).
Against this background, we would urge investors to keep calm and wait for markets to settle down before attempting to restructure portfolios. It is trite to say that selling into weakness is seldom a good idea, and it is very possible that we will see gyrations (downwards as well as upwards) in days to come. For those with additional cash reserves, this could be a good time to deploy money.
Before getting too excited, bear in mind that soon after the opening this morning, the FTSE100 was down 4.5% – which meant that it was back to the level where it was all of seven days ago. After the initial shock, the pound has also started to recover to levels not dissimilar to last week. Maybe this won’t be the end of the world after all?
As people went to the polling stations yesterday, we experienced some of the worst thunderstorms that we have seen in the UK for many years. But the clouds will lift as they always do, and the sun will shine again – perhaps even sooner than we think.
- Deon Gouws, Chief Investment Officer, Credo Wealth, London
Cyril Ramaphosa: The Audio Biography
Listen to the story of Cyril Ramaphosa's rise to presidential power, narrated by our very own Alec Hogg.