Markets saw another day of losses as investors remain unsettled over Britain’s divorce from the European Union, an event known as Brexit. Over the weekend, “Regret-xit” was a trending social media topic as some Brexit supporters wished they could take back their vote. Among Brexit’s other biggest losers were the British pound, which had plummeted to lows not seen in 30 years, as well as large financial firms that ran their European operations out of London.
Moody’s warned that manufacturers and food producers in Britain could see higher trade barriers and lower sales. The credit ratings agency also said increased regulatory risk would hit telecoms, airlines and drug makers.[i] Besides financial stocks, shares in U.S.-based companies that lost more than 10 percent of their value are those with large operations in Britain; they include XPO Logistics [XPO], US Steel [X], the real estate firm Jones Lang LaSalle [JLL], and human resources outsourcing firm Manpower [MAN].
So what is an investor to do in these times? Is anything immune from Brexit’s uncertainties?
Brexit’s long-term consequences remain murky and some believe its fallout will play out over years. Meanwhile, financial markets will remain volatile in the short-term, predict experts.[ii]
As investors ponder and digest the shock, magnitude and aftermath of Brexit, consider mobilizing your risk management arsenal. One option is to use stop loss orders, keeping in mind that liquidity could be thin as everyone heads towards the exits. There are some very real risks when markets are volatile and panic selling is prevalent. When the stop price is reached, a stop order becomes a market order. Since stop-sell orders become a market order once the stop price is reached, your executed price may not be close to your stop price. Hence, there’s no price guarantee with stop loss orders.
In a panicky market, a limit order to buy or sell at or better than your specified price can be the safer bet. The disadvantage is that limit orders do not guarantee you an execution if the specified price is never reached. For more, see Ways to minimize risk in volatile markets.
As well, when everyone leaves the party, it could be the time to bargain-hunt. After all, Warren Buffett observed that “most people get interested in stocks when everyone else is. The time to get interested is when no one else is.”
While the usual safe haven themes are gold and fixed income, there are also other offensive plays to consider for weathering turbulent markets.
|Theme||One-year performance as of June 24, 2016|
|Financial exchanges and brokers
In volatile markets, we tend to see higher trading volumes, boding well for businesses like financial exchanges and brokers that make much of their revenue from fees generated by securities trades. This theme is reflected in the Electronic Trading motif, a basket of 12 stocks that benefit from elevated trading volumes (for more, see Navigating stormy markets).
|+11.6% vs -3.4%[S&P 500]|
Refuge in gold equity plays
For those preferring traditional shelters from turbulent markets, gold has rallied in the face of Brexit and gold miner stocks, a proxy for gold, carry a weighting of more than 80 percent in our Precious Metals motif.
|+54.5% vs -3.4% [S&P 500]|
Reduce exposure to Europe
While Brexit uncertainties batter European markets, one strategy would be to focus on plays that are focused on our 50 states. The All-American motif may help insulate investors from the mayhem in Europe and the U.K.
|+12.4% vs -3.4% [S&P 500]|
High-quality dividend stocks are behind these motifs. S&P 500 is down 3.4 in the last 12 months.
[ii] https://www.thestreet.com/video/13617570/markets-volatility-following-brexit-is-short-term.html; http://fivethirtyeight.com/features/brexit-britain-votes-to-leave-european-union/
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.
Investments in commodity-related products, such as precious metals, agricultural products, and oil may be subject to greater volatility and liquidity risks than investments in traditional securities. Commodity-related products can be significantly impacted by underlying commodity prices, world events, government regulations, and economic conditions, which can dramatically affect the value of an investment.
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.