Brexit – Steve Robinson, Investment Manager

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There is a lot of talk about Brexit and what it means going forward and in particular the big moves on financial markets and whether they over-reacted and will recover going forward.

Looking at what happened in the equity markets in more detail provides some info on what investors were concerned about.

A quick glance at global equity markets showed that they generally fell around 3-4% on Friday which is a large fall but does happen from time to time. The most interesting moves were mainly in Europe. The UK FTSE 100 closed down 3.15% after being down 6% in early trade and recovering through the day, so after the initial shock the UK markets were down no more than US or Australian markets suggesting the financial market concerns on Brexit are not primarily about the UK itself. Across on the continent, Germany and France were down 6.8% and 8.0% respectively, almost double the fall in the UK, while the biggest falls were in the peripheral nations of Greece, Italy and Spain which were all down 12-13%, huge falls! Why, because these are the countries that have weak financial positions with large debt and are vulnerable to any economic downturn. Not helped by the fact that Spain has another general election on Sunday after the country has been in a deadlock since the December 2015 elections with the 4 main parties failing to form a coalition government. In Asia, China was down just 1.3% while Japan took a big hit, down 7.9%, Japan is another country in financial strife with high debt.

Looking at market sectors and individual company moves within markets the key point is that all through Europe and UK it is the banks that were hit the hardest on the day, in the UK, financials were down 12.3% with Lloyds down 21%, Barclays down 17.7% and Royal Bank of Scotland down 18%, in Europe Societe General was down 20.6%, Deutsche Bank and Commerzbank down 15.9% and 13.6%, Banco Santander down 20%, Greek Banks were down around 30% (although they are complete basket cases anyway with huge bond exposure to the Greek Government), in the USA Citibank was down 9.4%, in Japan the falls were across the market and not primarily financials. Going back to UK,  Vodafone Group was actually up 0.6% on the day and the consumer staples sector rose.

So the concern in financial markets is not about the UK economy post the Brexit. It is primarily ongoing concerns stemming from the aftermath of the GFC and the EU’s handling of the post GFC situation, particularly the European banks which are all still exposed to any potential defaults of the peripheral nations if the EU was to disintegrate. Calls for referendums in other EU countries could lead to further uncertainty. Any weakness in European economy due to lower demand in the UK will also affect the Banks.

What will happen when markets re-open, don’t know. After the big falls you would expect the markets could have a short term bounce but the UK market already has bounced having been down 6% and recovered through Friday to a down 3% position and had rallied strongly over the previous week on expectation of a ‘remain’ vote. The European Central Bank stepped up their money printing in March which drove equity markets back up, this included some very favourable lending programs to European banks under a new TLTRO (Targeted Long Term Refinancing Operation) which commenced in June, this helped push banks stocks up (and alleviated some of the concerns about banks profitability getting squeezed due to negative rates) but then they were vulnerable to a fall with any negative news. Global markets have rallied strongly since March, due to EU money printing and FED putting rate rises on hold, recently momentum has slowed and they just needed something to tip them over for another downleg, Brexit could be the trigger for another bout of weakness. The big winner was gold and gold mining stocks, gold went above US$1300/oz for the first time in 2 years, gold spiked to US$1360 on Friday on the Brexit news but fell back to US$1315, still a solid rise, most gold mining stocks in Canada and Australia rose between 5 and 15% on Friday, if gold can hold above US$1300/oz it is very positive.

 

Author: Steven Robinson

With decades of investment experience in equity markets managing equity portfolios and analysing companies across the market I have a valuable knowledge base to draw on. I believe that using bottom up fundamental research to identify quality companies with strong earnings growth profiles can provide a stock portfolio that will deliver superior investment performance.

Specialities: Equity Fund Management, Portfolio Construction, stock analysis, client communication, Responsible Investment.

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