Don’t panic about Brexit and focus on your portfolio
I don’t think Australian investors should panic about Brexit and rather focus on the country’s domestic challenges as well as the composition of their own portfolio. It is important though to be mindful about overseas developments and understand that ‘Brexit’ increases the general risk profile for high risk assets (for example stocks). Correct positioning of your portfolio, asset allocation and risk diversification can help you minimise the impact of these overseas shocks.
Are we heading towards the next crash?
Numerous people have asked me if we are heading towards the next global financial crisis and whether they should “sell everything”. No investor has every made money by doing nothing and just waiting for the next crisis. Of course nobody knows if there will be another crash and if it does happen there will be substantial financial loss for individuals, but should we give up and do nothing just because it may occur?
Wise-owl’s research has shown that the chance for stock markets to decline in a single month stands at 42%, however the chance of a severe decline of 20% or more is only 0.4%. The chance for a decline of 10% in a single month is 3%. These figures are based of 120 years of data for the Dow Jones Industrial Average.
Gold can act as a cushion during volatile times as investors shift their capital from ‘risky’ shares into the perceived safe haven which is gold. Wise-owl acted early and recommended a number of gold stocks in February and March, such as Resolute Mining Ltd (RSG), Gold Road Resources (GOR) or MACA Limited (MLD). These companies have experienced significant share price appreciation which has more than offset declines in other stocks such as the banks.
What is the outlook for the UK?
The future of the UK will depend on the outcome of the negotiations with its major trading partners. The European Union accounts for 45% of all UK exports and also other trade agreements will be impacted as they were agreed upon EU terms.
Brussels will have to find a solution that benefits the region but on the other hand demonstrates political strength. If the Eurozone offers the UK the exact same deal of free trade – no import or export tariffs on trade – it would send a message that any country can just leave and will not suffer any consequences. On the other hand, if Brussels decides to ‘punish’ the UK, it will likely weaken the European economy further which won’t benefit anyone at all.
The ‘leave’ voters have put Europe in a challenging position and are obviously more concerned about immigration, social identity or autonomy. Severe stock market volatility and financial shocks were predicted by just about every financial analyst in the world, and yet the people decided to vote leave. It appears that facts can’t compete with emotions in this case.
London & UK Unemployment
London will feel the impacts of the ‘Brexit’ decide more than other regions due to its importance for Europe. As large corporations use London as their gateway to Europe there is a risk that London may lose its status as important financial centre of the world. However, EU opponents believe that London will be better off free from EU deregulation, and could emerge as another Singapore-style financial superpower. Whatever the outcome will be, there is plenty of uncertainty regarding London’s global status.
The unemployment of the UK reached an eleven year low and yet many believe that with stricter immigration there will be more jobs available for locals. However, many forget that immigration is contributing to GDP growth and also stimulates demand. If has yet to be seen if a Brexit will be positive or negative for unemployment in the region and will likely depend on the outcome of the ongoing negotiations.
Conclusions for Australia
While Australia relies on sustainable global economic growth, Wise-owl believes that domestic challenges are more important than ‘Brexit’. Developments in the housing market and trade with China have a stronger impact on the Australian economy.
The conclusion is that the quality of stocks in your portfolio is more important than what the general market does. Our small-mid cap portfolio has returned nearly 20% year-to-date while the general market is down or flat at best.
|Simon Herrmann – Equity Analyst at Wise-owl
Simon is a financial advisor and analyst at Wise-owl. As an analyst Simon’s focus is the coverage of mid-capitalisation companies in the ASX300. His area of expertise includes information technology and cloud computing and his research reports are being featured on Bloomberg and Reuters.