Anyone watch Penny Dreadful I loved that show — a fun little Victorian horror epic, rife with amped-up melodrama, over-the-top gore, unrelenting flirtations with bathos, and, well, Eva Green. A real bodice-ripper. A couple Sundays ago, it had its series finale. And the thing is, as much as I liked it, my feelings are mixed. I miss it, sure, but I realize now that I am now free to do something else on a Sunday evening.
Like watch Game of Thrones — as tedious and byzantine as it often is.
The truth is, I feel kind of the same way about Brexit. The world has been focused for months now on the debate, the jumped-up (and in at least one case, lethal) emotions it provoked, the excesses of the arguments from both the Leave and Remain campaigns. Now, it's over, which brings a sense of relief.
Unfortunately, this is not the end of Brexhaustion. Now the hard, long, tedious and byzantine part begins: the public and backroom negotiations that will lead to some kind of new relationship between Britain and the European Union.
EU officials are pushing for a speedy resolution, in part to punish the U.K. by forcing its hand, in part to cauterize the wound of British separation so the gangrene doesn't spread to the rest of the Union. But this process will no doubt take years. How it will end, nobody knows.
For investors, conjecture about the long-term impact is probably useless right now. They have more pressing things to worry about — like what will happen this week.
On Friday, U.K. and European markets tumbled — a decline aggravated by their robust performance in the days leading up to the vote, which occurred in part because the polls suggested a Remain victory. (The polls are now 0-for-three in the U.K.'s recent history: mostly wrong on the Scottish referendum, wrong on the Conservative victory last year, and dead wrong on Brexit.) The pound, meanwhile, hit a 30-year low.
Other markets followed suit, amid a broad flight to safety. Gold soared. The S&P 500 and S&P/TSX composite were down sharply. In Japan, the Nikkei 225 was down almost eight per cent, as the yen soared (despite the Bank of Japan's negative interest rate policy!).
Anyway, that was the immediate reaction, and it was predictable. It was also not that bad, all things considered. The world did not end. This week, perhaps, will be more telling, as investors get over the shock and jockey for position in the new reality. Some will be looking to buy.
One of the places to look is among stocks that might have been oversold in the wake of the Brexit result. Some of this bargain-hunting has been going on already. For instance, London's FTSE 100, which comprises the U.K.'s blue-chip stocks, staged a rally late Friday, and closed down only about three per cent. At least in part, it was a pound play, in that many large-cap companies on the FTSE 100 earn much of their revenue overseas. By contrast, the FTSE 250, which comprises smaller companies more exposed to the U.K. market, ended Friday down more than seven per cent.
Investors looking to make an index play on the FTSE 100 might want to think twice, however, as many of its constituents are in financial services — the sector that is likely to be hit hardest by Brexit. British banks and insurers took a beating on Friday, and it's difficult to see them recovering until the clouds of uncertainty recede. Which, again, could take years.
No, for those looking for upside in Brexit, this is probably a time for cherry-picking. But the available trades are already getting crowded if you're looking to go shopping.
For instance, London-listed sin stocks did well on Friday. British American Tobacco and alcohol multinational Diageo both rallied. Both earn overseas, record revenue in pounds, and have the added upside of being pretty much recession-proof amid concerns about a downturn in the U.K., European and global economies.
If the economic impact of Brexit proves to be less dire than the doom-and-gloomers have suggested, other U.K.-listed multinationals in other sectors, such as consumer staples and even energy, might look like bargains.
As well, the uncertainty-driven selloff last week in other markets, like the U.S. and Canada, will no doubt recede as the Brexit shock wanes. Canadian financials, for instance, were down nearly three per cent on Friday, and U.S. financials had their worst day since 2011. There might be upside if you believe the market reaction was overdone.
The point is, looking past the panic might have benefits. And even amid the uncertainty, a few big factors make the environment pretty supportive of stocks. Despite the shock of the Leave vote, global markets did not seize up. There is still a lot of liquidity out there. This is not 2008 and Lehman Bros. all over again. Central banks are committed to responding, and monetary policy is likely to remain accommodative everywhere for a long time to come.
Of course, many retail investors will prefer to sit on the sidelines. But as Littlefinger of might say, a little chaos is a good thing. It creates opportunity.
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