Bagging Brexit bargainsPosted: 2016-06-17
Even before the terrible news of Jo Cox MP’s murder, the Brexit referendum has become nail-biting stuff. Polls are now suggesting a clear lead for Brexit (47:40), and while bookmakers continue to know something the polls don’t the bookies’ now give Remain only 65% chance of occuring, versus 80%+ only a couple of weeks ago.
This cliffhanger is showing up in the markets as a dip in FTSE, a drop in the pound, a drop in the Euro. Bonds are remaining fairly stable.
With one week to go I believe we might see the market impact worsen/strengthen. How best to profit from this turmoil?
My assumptions here include the following:
- Markets overreact to bad news. As Warren Buffett says, in the long run they are weighing machines, but in the short run they are voting machines. And voters are humans with humans’ cognitive biases – they overreact to bad news.
- If anything drops, it’s the pound. We already have a current account deficit of over 5% – which means money is flowing out of the country at a dramatic rate. The pound is nudging against $1.40:£1, a rate it hasn’t been at for 20 years. I think a shock Brexit result could see it falling to close to parity to the US dollar – it hit $1.08:£1 in the early 1980s for instance.
- Consumer sentiment will tumble after a Brexit vote. Thus consumer spending will tumble. This will in turn drive the usual cyclical recessionary cutbacks – companies will invoke hiring freezes, or worse cut jobs – new investments will be postponed, and so on.
- Uncertainty continues. At some level the result will provide momentary clarity. But an Out vote will then launch 1001 ‘what now?’ questions which will take months and years to answer.
Which companies are badly affected here, in the short term at least? The supposed list of victims here includes:
- Property companies. In the short term uncertainty will hit housebuilders like Taylor Wimpey and Persimmon. In the longer term assuming the pound drops then foreign money will prop up demand. I suspect that the impact on the major landlords like Land Securities and British Land will be second order at best – their businesses are denominated in pounds and have pound-based clients on long contracts.
- Retailers of foreign products. Supermarkets, for instance, like Tesco, Sainsbury’s, Morrisons. Clothing retailers like M&S, Next, Arcadia. Electronics retailers like Dixons Carphone. Household goods companies like AO.com. Department stores like House of Fraser, Debenhams.
Which companies are unaffected? Utilities companies, most obviously. Doubtless Tobacco companies.
Which companies are positively affected? Exporters (outside the EU, at least!) – which explains James Dyson’s support for Brexit. And stress counsellors.
What am I doing about this?
Firstly I’m setting up some low Limit Orders to buy the following:
- Tesco at £1.25/share.
- Next at £45/share.
- Persimmon at £16/share.
And secondly if Brexit happens and the pound falls below $1.30:£1, then I will be looking at our major exporters. Specifically BAe, Rolls Royce, GlaxoSmithKline, maybe Diageo.