This article is for the international investors trying to figure out what investment opportunities are available after the British vote to leave the Eurozone.
This is a tremendous opportunity to re-balance our portfolio and incorporate high-quality British assets on the cheap.
THE PREDICTION WENT BITTER
Now the catastrophic scenario that many feared has materialized, what is the next move for the global investors?
During the last week, there were much debates about a Brexit and while British at the poll, the Sterling and markets were swinging up and down has votes folded.
In the run-up to Thursday vote, a trend was developing with traders getting comfortable with the notion that the “remain” camp would prevail.
The result is the Sterling and Equity wiped out any gains in a single day built up during the week, and in a brutal fashion.
Fear is prevailing.
The world famous George Soros warned a few days ago that a Brexit would spill disaster not only in the short term but send the UK into a recession (here the article).
Who am I to say who is right or wrong?
However, so far, the Pound Sterling plunge already 9.4% against the US$, not so far from Soros’s prediction of a 20% slump. Possibility, next week we will witness a falling Pound Sterling to new low levels. I would like to note that a 9.4% drop for a currency is huge.
Just to put in perspective, the Black Wednesday (the most brutal attack to the Sterling) so the Sterling Pound drop 4.1%.
I’m wondering if Soros is going to make a killing with the Brexit, soon we’ll find it out. At the moment, we’ll focus on opportunities to invest for the long term (we aren’t Soros).
I’m basing this article on facts and hypothesis to determine the possible outcomes of the Brexit on the financial market. Only then we’ll be able to take advantage of new investment opportunities.
WHY BREXIT IS AN OPPORTUNITY
What makes the Brexit an excellent opportunity isn’t the decision itself by getting out of Europe, but instead the fact that the world markets were caught by surprise.
As a result, virtually every negative market shock in history has been a buying opportunity, and this one will be no exception.
Last Friday we already witness a panic with the British Sterling suffering its largest single-day loss in modern history. It isn’t the end.
In the majority of cases, whenever a market or trade end up so badly on a Friday, the following Monday is a catastrophe (could be a black swan if the central banks don’t step in the morning with some reassuring news).
I can expect the Pound Sterling to deep much lower.
Investors are panic-selling because they don’t know what’s going to happen next.
Nothing is better than panic to send share prices and Pound Sterling lower.
Fundamentally, I don’t see much of difference in the UK economy after going back to independence. Sure, they will renegotiate terms and conditions with partners, and they will save some EU partnership fees, but it isn’t going to impact the British multinationals.
Most of the biggest companies trading in the FTSE 100 are international conglomerate making most of their profit abroad. A lower Pound Sterling should only benefit.
Before discussing the investment available, let’s understand the consequences of the Brexit.
BREXIT CONSEQUENCES; DON’T PANIC YET!
First, isn’t going to happen overnight. The exit is a long process and technically will take two years to complete.
The negotiation would revolve around the trade relationship between UK and Europe.
If they follow Switzerland, a series of mutually dependent bilateral agreements that effectively mirror the EU treaties, but give at least the feeling of sovereignty.
The divorce between EU and UK might end up badly. European leaders might respond with hard exit terms to deter other member states from following suit. In the short, UK could be pushed into a recession by their biggest trading partner, EU.
Some international companies – chiefly banks – have voiced that they will be forced to cut thousands of U.K.-based employees, which would be a particularly large blow to London, given its position as the financial epicenter of the U.K. and Europe as a whole.
What about Europe?
The EU project risks disintegrating. If not total fail, the number of members could be reduced to the original 7 strongest one who shares similar economy and GDP.
People dissatisfaction with the European project is mainly focus on:
~ the strongest economies pump money forward the weakest one, which in my opinion will never be able to give it back. Greece is an example.
~ free movement of people has upset European population with an influx of immigrant from Africa and the Middle East who has different values and a poor education.
Will the UK shut down the borders? Difficult to say. The UK need low wage labor to sustain their economy, and closing the immigrant flux will not help local companies.
BREXIT; FACTS & OPPORTUNITIES
The pound plunged to its lowest level in more than three decades immediately after the vote. 9% was the biggest one-day drop in history.
The Pound is a world currency, reliable and with a long history. The Pound is the third most widely held reserve currency with 4% of the world currencies reserve. Investing in a weakening currency is a no brainier for the long term investors.
What are the probability the Pound collapse or go further down?
This chart shows the Pound against the US Dollar for the last 63 years. You will notice the constant decline of the Pound Sterling after the 2WW, however a deeper researched has shown the decline started after the 1WW.
By the chart, look like the Pound Sterling isn’t a good currency to hold for the long term. I still remember when I lost some of my savings back in 2010 when the British Pound went from US$2 to 1.41US$.
Now I’ve got a better understand that the Pound has a long history of proud (as the British people). Britain over the years continued to prop up their currency against a market that clearly wished it to be lower. Even the IMF intervene to rescue the Pound in few occasions and persistence control were necessary to ensure stability.
1979 was a turning point for the British Pound. Exchange controls were lifted, and for the first time, it was allowed to float. And it promptly fell. At the same time, the Us Dollar rose against major world currencies till 1985. The result was a historic low of 1.04 US$ for one Pound Sterling.
So, the closer the Pound Sterling get there this time around, the better chances investors have to profit. Back then the correction was harsh, but in the successive years, the Pound Sterling got back some of the ground.
I consider the Pound Sterling not a great currency to hold for the long-term investors, but a profitable vehicle for the short and medium term in conjunction with investments in stock.
According to Bank of America Merrill Lynch, investors pulled more than $1 billion from U.K. equity funds in just one week leading up to the vote, marking the second-largest weekly outflow for the U.K. in the past 10 years. Last Friday and next week will be a massive flow out of money, leaving on the table great opportunities to get in.
Companies with a U.K. focus have been hit far harder this year than their international counterparts. The FTSE 100, which tracks the U.K.’s largest listed stocks, is down 4.68% year-to-date. The FTSE Local UK, which only includes companies which make at least 70% of their revenues in Britain, is down 12.08%.
The FTSE 100 index is going to fall, the further the better. I’m expecting to see a drop of more than 10% and I would hope for a 15%. But investing isn’t for hoppers and wizards, I just follow the trend.
In the short term, all the sectors will be bitten hard with financial and discretionary stock hit hardest and staples and health-care share outperforming.
There are two possible scenarios here.
The Bank of England reigniting its quantitative easing pushing up the market stock or taking a side position, letting the market mechanism to take the course. This will be seen next week.
BEST UK ETFs
This Fund seeks to track the performance of the FTSE 100 Index, a widely recognized UK benchmark of the UK market’s most highly capitalized blue chip companies.
It’s one of the world’s most international markets, with around 70pc of the profits of FTSE 100 members coming from outside the UK.
The depreciation of the Pound Sterling would benefit the profitability of these companies.
The index is based in Ireland, so there is only 15% Dividend tax.
The P/E is high at 17% but always better than 22% from the similar US index funds. This fund invests in UK large caps with solid history and returns. The yield is exceptional at 4.37%, I know you love this if you are a dividend investors.
The Total asset is 2.7 billion, more than enough to keep this investment liquid as water. The cost a mere 0.07% per year (Vanguard knows how to make it cheap).
The only issue I’ve with this ETF is the large holding in Financial Services.
UK moving away from Europe is going to face financial institutions relocating their operations and staff to Euro zone hubs in the coming years, the City of London (and London’s housing market) will not be spared the pain.
While researching for the perfect investment vehicle, I notice the excellent yield by this ETF; 6.11%.
The fund focuses on companies which offer high dividends of the FTSE 350 Index.
Unfortunately, the financial sector is 34.5% of the total portfolio. Almost double than the previous ETF. However, I note down this excellent ETF as investment opportunity for the future.
This ETF invest only in the Financial Service sector in Europe. After the Brexit, this ETF till today lost 24%. Pretty nasty.
BEST UK INDIVIDUAL SHARES
This Australian company is one of the biggest world mining companies. For the last 3 years, the natural resources sector performed so badly and reached bottom price valuations.
BHP shares are trading on the UK market exchange for 841 Sterling. Monitoring this stock for a future buy opportunity.
At the moment is trading at 27, below 22 is a no brainier buy. This company share’s price is last seen back in 2004.
AstraZeneca PLC (AZN.L)
I’m positive on pharma companies and AstraZeneca is one of the giant in the world. Constant revenue, profit climbing, timely dividends are just few of the strength of this stock.
WHAT INVESTMENTS TO AVOID AFTER BREXIT
The majority of local investors will suffer, but international savviest investors will benefit.
Domestic banking and retail share will fall sharply, while staples (tobacco and beverages) and pharmaceuticals should benefit – at least in relative terms – from weaker Sterling as well as their naturally defensive earnings base.
Avoid the small caps, like the FTSE 250 which will experience a large drop-off. Most companies here rely on the local economy to prosper, but with the Brexit, the British population will luckily cutting on spending and investments till a clearer economic picture.
Stay away from bonds, foreign investors might panic at first, initiating a run on U.K. government bonds or gilts. If you are into bonds, US Treasury and US corporate bonds are the best place to be this year and most probably next.
Europe isn’t immune to this situation. The Italian “Borsa” lost 12% of its value on Friday, showing how fragile is the state of the most indebted countries in Europe (Italy, Spain, Greece and Portugal). The Brexit is sending waves through Europe so avoid any markets there including the Euro bonds.
The Brexit is ramification through the financial system and might trigger a world recession if other factors would step in such a default of China or an unforeseen event.
This situation will benefit the most US as its the only country in the world increasing interest rates. Investors might flee UK and Euro zone bond markets for safer US Treasury bonds.
Europe and UK central banks will inject cash into the system, they might even restart a QE or expand on it.
Gold is an asset to keep at the moment, at least a 10% of any portfolio to hedge against this global fragile financial world.
For myself, the only investment that suit best my needs is the Vanguard FTSE 100 ETF (VUKE.L). The reason I’m going to invest shares here is the convenience to have access to the top International British companies in low-cost fashion and expose myself to the Pound Sterling.
Readers, Are you buying the dip? What are the best investments post-Brexit? What are you doing to take advantage of this chaos?