My Portfolio

Sunday, June 26, 2016

Brexit: What it means to me

Finance bloggers all around the globe can't survive without having a post on Brexit. So can't I.

I have been wondering what is the fundamental impact of Brexit on my investments, and the economy. I could only think of one word to summarise it: Trade. But clearly, nothing is so simple.

First, we need to understand why Brexit happened.

1. People had enough of experts opinions (IMF, OECD, Fed)
Basically, people thought leaving EU will be more beneficial. They will be able to stop carrying the debts of the EU.

2. Immigration
The North is represented by angry working class that have issues with immigration. EU allows free movement of people and voters failed to understand that more than half of the immigrants came from outside the EU. Some believe that migration might let terrorist enter, causing more problems than the economic benefits it may bring.

3. Two campaigns for Leave
Two campaigns, one for a more liberal Britain and another for a closed, protected and less global one, appealed to different sets of voters. This helped Leave to garner more votes.

Britain will be subjected to terms decided by other EU members. We know that Brexit is a catastrophe for EU and they will make sure nobody follows Britain example. This means Britain will not get a good deal.

1. Trade will be affected. 
There will be taxes imposed and financial services may be blocked.

2. Political Fallout
Cameron resigned. Members of Parliament are split between Remain & Exit. Conflicts are bound to occur. London is unhappy about the exit, and wants to "exit" from Britain and go back to the EU. 
The Youths blame the Old for deciding their fate.

And we all know what happened. Pound fell by around 10%, big banks stocks fell, global stocks in the red. 

The Question is: Is it an over-reaction?
If you ask me, I would say, i don't know. I thought the fundamentals should not have changed so drastically, but the market may be trying to price in future potential risk events, such as other "exits" from the EU, and trade barriers issues which will lead to less trade, and a slowing economy. Not to mention political and social concerns that may well lead to economic repercussions. London may cease to become the global financial center, replaced by Frankfurt.
Financial services make up 8% of Britain GDP.
1 out of 7 UK jobs are related to financial services.

Asking around for opinions on the general trend of the market, I found out that the Dow Jones has fell 600 points (3.39%) and that must have spooked many investors. However, looking at Singapore stocks, it hasn't hit Jan/Feb levels, and i am starting to feel an opposite concern. Maybe, the over-reaction has already occurred. Maybe, the downside has all been factored in.

We can already foresee Janet Yellen delaying interest rates for the rest of the year. Given Brexit will take around 2 years to unfold, this may well mean interest rates be delayed for the equivalent period. If the market take this confirmation as a "news", markets are going to go up.

While i cannot foresee the future, i have started to take action.
Brexit is opined by many to be one of the most exciting event and we are certainly lucky to be part of this historic moment. As i am building up my portfolio, i believe this is an opportunity to pick up some wonderful companies with strong fundamentals, at a low cost.

This is why i am fortunate to still be able to use Std Chart to dollar cost average. By setting limit orders on periodic price intervals, i am able to participate in the "falling knife" without risking too many eggs in the basket. This will keep me in the action, and yet be able to sleep at night.