We like to buy when others panic. Unfortunately, while there has been lots of noise and volatility around Britain’s vote to exit the European Union, the market response has been orderly and appropriate so far.
Lloyds Bank is one of our larger holdings in the International Fund. It got whacked 20% on Friday, and the pound was 8% weaker versus the US dollar, so the impact on the fund was worse than that. The UK economy is likely – or certain if someone doesn’t come out with a plan soon – to enter recession, and that is never good news for a bank. Lloyds’ loan book is also heavily weighted towards residential housing, so it is exposed to a fall in property prices. It’s well capitalised and unlikely to become distressed, but a 20% selloff looks roughly sensible to me.
The International Fund also has a small holding in real estate agent Countrywide Plc, which also saw its shares down some 20%. The mechanism is less clear here. Revenue is a function of house prices and selling volume, so any rush for the exits might be a good thing in the short-term, but the business is clearly exposed to elevated house prices. We added a little to our holding as 20% looks extreme, but it’s at the extreme end of sensible rather than an irrational response.
Rolls Royce saw its shares trade up on Friday. It incurs expenses in the UK and generates mostly US-dollar revenue, so the weakening Pound is likely to be something of a windfall for the company.
Outside the UK, there is less of a rationale for a selloff but mostly we saw 3-4% declines for the stocks we are interested in. It added up to a rough day for the portfolio, down more than 4% on the day, but on an individual stock basis we need more than 4% to get us interested.
We will see how things unfold over the next few weeks. But, all in all, I’d say it has been a mostly rational response.
5 thoughts on “The Market’s Rational Response to Brexit”
Under Osorio Lloyd’s appears to be one of the better run banks in Europe and has one of the more conservative capital structures.
Notwithstanding the near term uncertainty, does Forager believe the value of the business is 26% lower than it was 1 week ago? Given their leverage bank equity values can be hit hard by relatively small drops in asset values so maybe it is fair but it does seem severe for a well run, well capitalized bank.
That’s been my view as well. I have a UK self invested personal pension that is stuck in the UK for the next 22 years. The UK stocks that I really liked never moved down enough to pique my interest, but ironically, the ructions that the Brexit has apparently caused in other parts of the world, like Australia, has indeed created opportunity.
The market participants of many European exchanges seem oddly sanguine about the experiment that the Brits have just started on themselves. A case in point: Groupe Eurotunnel is fairly modestly down despite the fact that if there is one business in the world that is going to suffer as a result of Brexit, it will be theirs.
There is plenty of rational for a sell of in the australian market-the us dollar strength(and subsequent commodity price weakness in particular the price of oil) the effect on interbank lending rates and the concurrent significant devaluation of the yuan.Bounce there may be but this is not a healthy market.Time for extreme care
Fascinating that the FTSE 100 now above pre Brexit levels in local currency terms, though the banks are still well down. Can one conclude from this that the ‘market’ thinks Brexit, while bad for the money changers, may actually be good for the rest? Or is it just the usual, “Things are bad, central bank will drop rates, no return for fixed interest, gotta put the money somewhere” story?
Also rather amused by George Soros’ doom and gloom comments. Past experience suggests George had bet big on the other side this time.
In Australia we keep getting told that a lower AUD$ is good for the economy, makes our exports more attractive and will keep us out of a recession.
We are told that Brexit will cause a recession in 2017, but the UK pound has fallen by circa 8% thus making UK exports more attractive; ie. huge manufacturing/export car industry.
Who does one believe ??