I hope you survived the market panic following the Brexit vote. It sure was a tough two days before the rally back to breakeven in the past week!
Although the final vote before the polls showed a “remain” vote winning by one percent — with 9 percent undecided — the United Kingdom voted to leave the European Union.
That just goes to show that polls aren’t doing as good a predictive job as they have in the past, something that will likely haunt the US presidential election. What’s more, never forget that undecideds will have to decide, and even if they stay home, it can affect the outcome.
With remain in the lead, stocks rallied strongly last week, up about 2 percent ahead of the election. With a massive 3.5 percent drop in one day, though, stocks were only off about 1.5 percent in a week. All things considered, that’s not a bad week.
Despite the fear out there, so far, Brexit looks like yet another bump on the road to your investment journey. For the moment, I’d place this in the category of geopolitical events, not a financial event. Like the US losing its AAA credit rating in 2011 or the 9/11 attacks in 2001. The impact is more political than financial. That’s why stocks have bounced so quickly — indeed, historically quickly.
Typically, stocks recover from such events within the space of a few weeks, and more often than not tread higher from there. That’s been the case with 9/11 and the 2011 debt ceiling crisis, and includes other events such as the Cuban Missile Crisis and the start of the Korean War. So there’s a long history of stocks trending higher following geopolitical fears.
What does this mean for US investors? A hint, but not much, of an opportunity if you’re willing to sift through the data. Most US stocks have little exposure to the UK. For multinational firms that do, it’s a small percentage of revenue, and the large drop in the pound makes the UK a more compelling place to invest than just a week ago. And, potentially, there’s the opportunity for US firms to have operations in Europe without having to deal with the increasingly bureaucratic decisions of the EU apparatus.
From an operational standpoint then, most companies aren’t affected by this event. That’s why shares bounced this week. That’s also the key difference between this event and the market selloff at the start of the year. Valuations got a little ahead of themselves and fear hit the market hard. Today’s fear is of a different nature, so stocks will react differently.
One difference is European money-center banks have taken the worst beating. I’m not sure I’d touch the banks yet, given the number of other countries in the Eurozone also disappointed with how the EU project has worked out. And one bank in particular, Deutsche Bank (DB), had its US division flunked by the Fed in a recent stress test.
But many British stocks now look like a much better bargain compared to US counterparts.
Take the case of Vodafone (VOD). It’s a telecom, so it’s a boring, but easy-to-understand business, including not only mobile telephone customers but broadband and TV customers. It’s got a great dividend yield, some debt, and otherwise looks like a UK version of AT&T (T).
Yet in the past year AT&T has surged 16 percent to multi-year highs, Vodafone has dropped 17 percent. That’s a relative change of 33 percent at a time when the S&P 500 returned -1 percent.
Yes, things look bad for Vodafone now, and the Brexit result certainly add a fair amount of uncertainty. Yet stocks are mean-reverting over time. I’d expect AT&T’s relative outperformance — no doubt driven by its attractive yield — to eventually stall out. And with Vodafone being a relative high value in the global telecom space right now, they’ll likely perform better going forward.
But buyer beware: most British blue chips don’t have such a large relative value.
Consumer goods giant Unilever (UN), an Anglo-Dutch firm, has a much larger global footprint than US-based competitor Procter & Gamble (PG). Both stocks trade at a rich valuation, north of 22 times earnings and sport more modest yields in the low 3 percent range.
Consumer goods companies are the best example of the best defensive stock being a good offensive one as well. Firms with strongly branded products can raise prices when times are good, hold off on cutting prices when times are bad and thus maintain strong profit margins.
That’s also the case with British American Tobacco (BTI) and US-based Altria Group (MO). Like soap and shampoo, cigarettes are consistently profitable and everyone has their preferred brand. Both companies trade nearly identically compared to traditional metrics like earnings and dividend yield.
At the end of the day, investing is still a business. Looking beyond the doom and gloom headlines is essential to long-term success. There are still plenty of overvalued stocks out there, but this latest bump on the investment road has created a few more opportunities for investors.
If you’re looking for an opportunity in safe part of the UK economy, Vodafone is your strongest bet right now. If there’s a bigger selloff in the consumer goods space, a company like Unilever or British American Tobacco might be a buy.
If you don’t feel like buying right now, that’s fine too. Usually the best move you can make as an investor is to do nothing (and if you did nothing in the past week, you probably ended up back where you started).
Like those old World War II posters from the period of the London blitz, it’s simply time to keep calm.
is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and is managing editor of Financial Intelligence Report. To read more of his work, GO HERE NOW.
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