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After Brexit, more demand for U.S.-focused stocks?

27 June 2016 in Trading Ideas

Key Takeaways:

It’s often the unexpected that causes financial markets to move the most, and that dynamic came to life again on Friday following the vote by British citizens to leave the European Union.

The result, by a 52 percent-to-48 percent margin, was surprising because several polls and prediction betting sites had suggested in the days before the June 23 vote that support for the U.K. remaining in the EU had both a slight edge and most of the recent momentum.

Surprise, surprise. The “Brexit” vote won, and global financial markets took a tumble – to the tune of $2 trillion in global stock value as of Friday’s close. Many investors sought out what they perceived as safer havens in what is expected to be a volatile time ahead.1 The loss included $830 billion in the market value of U.S. stocks, including a decline of $657 billion in value of S&P 500 companies. The Dow Jones Industrial Average tumbled more than 600 points, or 3.4 percent, on Friday.

And that was just stocks – other impacts were just as acute: the British pound fell against world currencies by its greatest margin since the “Black Monday” caused in part by investor George Soros’ short bet in 1992, and S&P Global Ratings said it was preparing to downgrade the U.K.’s credit rating.2

The obvious question after Thursday’s vote and through the weekend was — what’s next? Or, more to the point, what will Brexit look like and will it have a continuing effect on financial markets? As the Wall Street Journal pointed out, even the practical questions are overwhelming for British banks, insurers, and fund managers now operating in a cloud of uncertainty.3

“Anyone actually buying and selling securities—the banks’ trading desks—are definitely affected and many may need to move to the Continent,” the Journal wrote. “People who travel to perform their work, such as advisers for mergers and acquisitions or capital-raising, may be able to stay based in the U.K.” In addition, managers’ products would have to be re-registered elsewhere in Europe if the U.K. loses its passports.

U.S. markets
For U.S. investors, the “what’s next” question generated nearly as much uncertainty – particularly after American traders saw their own markets sell off by nearly 4 percent at Friday’s market close and more on Monday. Most analysts in the vote’s immediate aftermath do expect our economy to feel some effects – after all, roughly 25 percent of S&P earnings come from Europe. The strong dollar will weigh on exporters, with Europe being a major export market for China. Will China allow its currency to slide? You may remember earlier this year when a devaluation of the Chinese currency (yuan) was also seen as having the potential to trigger major financial-market upheaval.

One expectation offered by many analysts was that the Brexit vote will likely slow down the Federal Reserve’s intention to raise interest rates, although the Fed itself has been transparent about taking its foot off the gas.4

With the U.S. central bank trending toward looser economic policy, and interest rates already near multi-year lows, the case could be made for high-quality dividend stocks. Hank Smith, chief investment officer of Haverford Trust, told Kiplinger’s last week that he likes consistent dividend-paying stocks such as Johnson & Johnson (NYSE:JNJ), Altria (NYSE:MO), UPS (NYSE:UPS) and United Technologies (NYSE:UTX).5

Another dividend investment alternative to consider are the motifs focused on dividends, including these:

Motif Percent returns as of June 27, 2016
Motif S&P 500  
High-Yield Dividends         +26.2% -0.6%
Dividend Stars +12.2%
Defensive Dividends +7.7%
Growing Dividends +0.1%

 

Many of these companies are in the S&P 500 index, and we have noted previously that SPY, the ETF that tracks the S&P 500, has outperformed other equity themes and asset classes such as U.S. bonds and emerging markets (see “Are we still in a US bull market”).

Yet another alternative is to align with companies that are the antithesis of a multinational such as the companies whose stocks are behind the All American motif. All of these portfolio companies derive 100 percent of their revenue from the U.S.

In the last month, the All American motif has slipped 0.2 percent. Over the last 12 months, it has gained 10.7 percent.

 

1Eric Platt and Nicole Bullock, “Global markets take $2tn Brexit hit,” ft.com, June 25, 2016.

2Matt Levine, Money Stuff column, Bloomberg.com, June 24, 2016, http://www.bloomberg.com/view/articles/2016-06-24/brexit-stress-and-video-interviews.

3Paul J. Davies, “Brexit and Banks: Fearful Start on a Long, Uncertain Road,” wsj.com, June 24, 2016.

4Sam Ro, “What the Brexit vote means for the US economy,” yahoo.com, June 24, 2016, http://finance.yahoo.com/news/what-the-brexit-vote-means-for-americans-120850807.html.

5Anne Kates Smith, “What Brexit Means for U.S. Investors,” Kiplinger.com, June 25, 2016, http://www.kiplinger.com/article/investing/T038-C008-S003-what-brexit-means-for-u-s-investors.html.
Investing in securities involves risks, you should be aware of prior to making an investment decision, including the possible loss of principal. An investment in individual stocks, or a collection of stocks focused on a particular theme or idea, such as a motif, may be subject to increased risk of price fluctuation over more diversified holdings due to adverse developments which can affect a particular industry or sector. Investments in ETFs can include those with a narrow or targeted investment strategy and can be subject to similar sector risks than more broadly diversified investments. Motif makes no representation regarding the suitability of a particular investment or investment strategy. You are responsible for all investment decisions you make including understanding the risks involved with your investment strategy.

Performance returns, including 1-month Return/Return Since Inception/1-year returns indicates the performance of this particular motif over that stated period of time as of the date provided. Performance is quoted for informational purposes only, however, there is no guarantee those returns will continue. See how we calculate returns.

While certain companies may have consistently paid dividends in the past, there can be no assurance or guarantee that they will be able to continue paying dividends in the future.

 

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