Here’s our first guest blog from Steve Williams of Cormorant Capital Strategies. He provides invaluable research, guidance and wisdom all of which goes into our client portfolios. Here are his thoughts on Brexit and what investors should do:
A little over three months from now, on 23rd June, residents of the United Kingdom of Great Britain will be asked to vote on whether we remain in or leave the European Union.
Similar to that of Scottish independence, it’s a fascinating question and the answer may give rise to a genuinely seminal moment in our nation’s modern history. It is inspiring a terrific debate which is already close to fever pitch.
But if you ask me what it is that investors ought to be doing..…I’m afraid my answer is pitifully lacking in drama.
Assuming that investors are carrying an appropriate level of risk – given a reasonable assessment of their return requirements, capacity for loss and tolerance for risk – and providing that investors are reasonably well informed about what that risk implies, they should do nothing.
My main motivation for suggesting that we, as investors, do nothing is that I am unconvinced that the outcome – in or out – will fundamentally change the potential for companies (in the aggregate) in Britain, Europe or further afield to generate profits over the medium- and long-term.
Nor do I think that the outcome – in or out – will be the dominant force in shaping interest rate expectations in Britain, Europe or further afield over the medium- and long-term.
I am not arguing that the capital markets will be unaffected in the short term however.
It is difficult – some would say impossible – to accurately predict the result of the referendum.
The polls are tight. In fact, the poll of polls, one of which is hosted by NatCen Social Research and Professor John Curtice and available at whatukthinks.org, indicates that the ‘Remainers’ lead the ‘Leavers’ by the narrowest of margins (51% to 49%).
If the polls remain close up until the referendum, we are likely to see some unknown level of additional volatility.
Indeed, in lieu of the potential for risk, the Bank of England (BoE) has signaled its intention to quadruple its Indexed Long-Term Repo operations during June to ensure that UK banks have more than enough access to liquidity around the referendum. That is a sensible contingency.
Make no mistake though, policy changes at the world’s major central banks and a sustained decline in Chinese manufacturing mean that a broader volatility is here to stay in any case.
In this regard I am at one with Mark Carney, governor of the BoE, when he speculates that while ‘Brexit’ is the biggest domestic risk, it is the global risks that represent the harshest of challenges for the UK economy.
Ultimately, investors should not fear volatility – volatility is, after all, the driving force for higher returns.
What they should fear is holding too risky a position and selling out (or switching to a lower risk profile of investments) during periods of decline.
In my experience, it is rare that those investors participate fully in the subsequent and inevitable recovery.
In other words, it is not so much the wider market that harms investors’ aggregate wealth as it is a tendency toward hyperactivity and short-termism.
p.s. Actually, if I were a betting man, I’d have a few quid on Britain staying in. According to oddschecker.com the betting markets give the Remainers a far bigger margin of safety than the polls suggest. The average decimal return is 1.4 to stay versus 3.4 to leave. That implies a 71% chance (1 divided by 1.4) that the status quo will be preserved.