On June 23, the United Kingdom voted in favour of leaving the European Union with the “exit” campaign capturing 51.9% of the vote. Referred to simply as the Brexit, the effects of the historic referendum were felt around the world—and presented investors with a unique short-term opportunity. The Brexit vote has also opened the window of opportunity for long-term investment opportunities.
Short-Term Investing Opportunities from Brexit
The effects of the Brexit vote were immediate and felt around the world. In the days following the vote, global stocks were routed and more than $2 trillion were wiped off stocks. The British pound spiralled to a 31-year low against the U.S. dollar.
In London, $170 billion of value evaporated from U.K. companies in the opening minutes of the stock market on June 24. The FTSE 100 closed the day four percent lower. In the U.S., stocks plunged, opening sharply lower. The Dow Jones Industrial Average fell 520 points, the S&P suffered its worst opening since 1986, and the technology-heavy NASDAQ shed 3.6% at the open. The TSX ended the day down 2.5%.
Uncertainty and fears of a recession in the U.K. sent the pound plummeting. Before the Brexit vote, one pound was worth $1.48 U.S. In the days following, one pound could buy $1.32 U.S.
But by the middle of the following week, Brexit fears began to subside. U.S. and Canadian stocks rebounded. The FTSE 100 had regained all its losses since the vote. The pound, on the other hand, remains fragile and is expected to be vulnerable to shocks. That’s because the country’s political situation is in flux and exit negotiations with the E.U. could take years.
The Brexit vote presents investors with a number of investing opportunities. In the immediate aftermath of the two-day market plunge, investors poured billions into exchange-traded funds that track gold. Those that traded pounds for the greenback before the referendum reaped the rewards.
Long-Term Investing Opportunities from Brexit
The key question is…what’s next?
While many think the U.K. could slip into a recession and the ripple effects of the vote could be felt throughout the E.U. for years, the real consequences are likely to be more gradual as they unfold.
For example, the U.S. dollar, euro, yen, yuan, and pound are the currencies that usually make up the International Monetary Fund’s reserve currency basket. If the U.K. economy struggles, the pound will lose value and could lose its status as a reserve currency.
This could raise the cost of capital for businesses as investors choose to hold fewer U.K. assets. The lack of investment could translate into weaker bargaining positions in future negotiations.
In an effort to keep the economy moving, the Bank of England could cut rates further, possibly to zero from the current record low of just 0.5%. The Bank of England could cut rates by one-quarter point when it meets in July, and again in August. While this is would be intended to shore up the economy, lower interest rates would also reflect weaker growth expectations.
Despite the doom and gloom, the Brexit vote presents investors with a number of excellent long-term opportunities. For starters, investors ran for the exits, sending some excellent stocks deep into the red for no good reason. There are a lot of great bargains out there right now.
When it comes to stocks, it’s important to focus on valuations. Value stocks have outperformed growth stocks and the broader market in 2016. Longer term, small-cap stocks look compelling. That doesn’t mean investors should re-evaluate or shuffle their entire portfolio. They need to be selective.
Learn-To-Trade.com, Toronto’s Leader in Stock Market Trading Courses
In the lead-up to the Brexit vote, there were a number of strategies investors could have used to make money no matter what the outcome was. Brexit fears may be subsiding, but the economic effects of the vote will be felt for a long time.
This has presented investors with a historic opportunity. But there are risks. The more you understand, the better your chances are of developing a profitable trading strategy that rewards you with long-term growth.
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