Keep calm vs Armageddon
What an interesting week on the market. We normally don't pay too much attention to intraday movements - but last Friday (as the realisation that Britain might, then confirmation that it would, leave the EU played live through the Australian market) was fascinating.
A week later - where are we? Well most markets have recovered somewhat, and actually quite well - with the UK, perplexingly, fully recovered. Australia is now only 0.9% below it's pre-Brexit level. This is illustrated in the following graph.
Surprise, then recovery
In the lead up to the Brexit vote - commentators, betting agencies and markets did not expect an exit vote. Market's actually rallied in the few days leading into the vote, on the expectation that the vote would be in favour of Remain. Then the vote was for exit, and the one thing that market's don't like is a surprise. Hence we saw the strong falls in the immediate days after the result was announced.
The recovery in many markets later this week occurred as the initial shock passed, and as talk settled around central banks' willingness to intervene, if required.
UK vs EU recovery
It is quite perplexing that the UK market has recovered, especially as there is so much uncertainty regarding what agreement will be reached with the EU over the coming two years, and the real prospect of a recession. That said, Britain's pound has fallen considerably (down over 10% vs the USD since the exit vote), and can fall further - providing the British economy with a significant stabiliser (unlike the euro).
It has been interesting reading the commentary this week regarding the EU and the Brexit vote. Points of note are that it has really brought to the fore the current failings of the EU, for instance the Italian banking crisis (see Anthony's comments in W&D: share prices in southern European banks have fallen considerably over the last week), and unemployment in southern Europe.
Additionally, and significantly in the context of the EU negotiations, the balance of trade flow is from the EU to the UK (i.e. reducing trade between Europe and the UK actually hurts Europe too). And finally, empowered separatist movements, within other countries and areas (e.g. Catalonia) will potentially put more pressure on the EU structure itself. These are perhaps three of the reasons why EU markets have not recovered.
First Samuel retains our cautious investment approach, and the quite high cash balance (12.6% at close of trade yesterday, plus another 13.8% quasi cash - expected takeover proceeds from Pacific Brands, Patties Foods and Ausenco). There is much water to flow under the Brexit bridge yet, and other economic and macro concerns (Trump is already coming back to press attention).
Thus we expect volatility into the first half of the new financial year. On the positive side, such times are when we find the opportunities to wisely invest.