The upcoming referendum on whether the U.K. should stay or leave the European Union (or “Brexit”) has become a tremendous news story. Given the uncertainty and excitement the press has been hard at work, in turn creating anxiety in financial markets and concern among individual investors. Ongoing close poll results and high profile individuals on both sides have further added fuel to the fire.
The reality is no one knows whether a) the “leave” or “remain” vote will win, and b) what a “leave” vote will mean fundamentally for Britain. Even in the case the “leave” does win, it will be many years before the terms of an exit are negotiated and, in the meantime, EU laws and treaties will still be in place.
As our supporters know, we do not believe we can predict the future. The best we can do is understand the potential outcomes, use that lens to search markets for opportunity and work to minimize risk when we are not being paid to take it. These “big picture” events can create market dislocations that will provide opportunities to buy great companies at attractive prices. We are not here to take a stance on this situation or to try to pretend we know the unknowable mentioned above, but what we do know is on June 24 (the day after the referendum), the sun will rise, the trains will run, the stores will open and Great Britain will continue to exist. Our job as investors is to be prepared – we need to do the work ahead of these events in order to proactively take advantage of any market dislocations.
With this in mind, four members of our team spent a week in the U.K. meeting many companies to identify those strong business models which will continue to compound value no matter the outcome on June 23. Over five days, we met with a dozen selectively chosen companies from a range of industries including consumer, financials, real estate, technology and industrials. I’m happy to say meeting these business leaders gives us the confidence to buy shares when an opportunity presents itself.
We did hear that uncertainty has had a near term impact on the economy: many companies are on hold pending clarity. This has resulted in a slowdown of investment, advertising, financial transactions and general consumer spending. Many of these concerns have also been reflected in the stock market, with the index down 13% over the last year and the currency down over 10% during the same timeframe. Within the index we have also seen exporters perform much better than domestically focused shares.
We don’t have the ability to predict the future and we will not “bet” on an outcome one way or another, but we have seen these events play out before. Many of you will recall over the years when companies in a region were ignored because of political issues (e.g. U.S., Brazil, Spain, France, even Quebec during the referendum.) In many cases this has been an excellent time to invest, if you follow a consistent, bottoms-up investment process. We do not believe this situation will be any different, and by selectively targeting the business models and leaders we can believe in, we have a shopping list of companies ready for investment when short term uncertainty dislocates market price from the value we see.
As we are now back in the office we have some work to do: scrubbing our numbers, comparing notes and building our risk-reward scenarios so we are prepared for whatever happens. While we don’t know the outcome, we will have a game plan to act in the best interest of our clients, one way or another.