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Sunday, 22 October 2017

The smart money is sitting the Brexit panic out

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  • James Saft - June 2014

All over the world financial advisors and brokers are calling clients and urging them to take steps to “make” or “save” money in light of the British vote on EU membership on Thursday.

All over the world smart clients and investors are ignoring them.

Stop me if you have heard this, but I repeat it because so many obviously haven’t or don’t listen.

Neither you nor your advisor know what will happen on Thursday when Britain elects to either leave or remain in the European Union. What’s more your, or her, ability to translate that extremely uncertain knowledge into advantage is very doubtful.

The only thing for certain about “Brexit proofing” your portfolio is the transaction costs.

On the eve of the critical British referendum on Brexit the polls were reasonably tight, with enough variety to please all sides.

Votes for “leave” nosed ahead in two late polls released on Wednesday by one and two percentage points, while the probability as expressed by bets on the Betfair exchange moved to 76% for “remain”.

In either event, it is fair to expect a certain amount of frightening market volatility both during and after the election.

There is no avoiding it: a vote to leave would have by far the more damaging short-term impact.

British economic output would likely be quite substantially hit and large swaths of its business model would come under threat.

The question is not, “Is this an important event?”. Surely it is. A better question would be, “Is my outcome likely to be improved by taking decisive action?”

And the answer is, probably not.

The market moves under both scenarios will be jerky and unpredictable, and this applies not just to sterling assets.

The future of the EU is at stake too and the event rises to a level of gravity that central banks around the world, not to mention banks, are preparing for all the contingencies they can think up. Leave them to it.

While parts of the financial media and advisory and broking community love to create a sense of hysteria around events like these, the advantages of joining in are dubious.

Let’s be clear: I am not saying that bad things won’t happen. Your portfolio may get hit badly and it may suffer significant volatility. That’s life in the big city.

Missing out

Many investors clearly think they can play this game.

Outflows from UK equity funds were the second highest on record, a net US$1.1bn, in the week to June 15, according to fund tracker EPFR.

Lipper data show assets in the UK fund management industry have fallen by almost 20% over the past year, down by about US$300bn to US$1.35trn.

But by attempting to dance in and out of markets and assets around an event, you are taking on a substantial and virtually unknowable series of risks. For one thing, you may guess wrong about the direction of markets and miss out on a spectacular up day.

A JP Morgan Asset Management study found that an investor who missed out on the ten best days in the S&P 500 stock index between 1993 and 2013 would have seen their annualized return fall to just 5.4 percentage points. That compares to 9.4% annualized for those who stayed in the entire time.

A University of Michigan study of the 7,802 trading days from 1963 to 1993 found that just 90 days, a bit more than 1% of all days, generated 95% of all returns.

If you are good at guessing there surely must be easier ways to make money out of it than by guessing firstly about the Brexit vote and then secondly about the markets as a derivative.

Again, this is not to say that your investment outlook and allocations should not be informed by political developments.

Britain’s decision to remain or leave will have far-reaching impact on the shape and performance of its economy and its publicly-traded companies.

Again, though, this is a complex situation, with much to be determined by the steps taken by Britain and its trading partners, or EU partners, in the months and years after the vote.

Taking a decision to lighten your allocation to Britain may well be a good and reasonable step. It may have been a good and reasonable step when first having the vote was agreed. The way to do this was slowly and gradually, not by reacting to polls and surges of emotion.

On Thursday and Friday, do something British: make a cup of tea, sit back and don’t trade.

(James Saft is a Reuters columnist. The opinions expressed are his own. At the time of publication he did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com)

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