Global investors continue to be tested on how much volatility they can stomach. Only a year ago, we wrote about Grexit and its potential impact on global markets – now a year later, market headlines are being inundated with the next European Union (EU) exit in question – a binary (yes or no) referendum vote for a British exit (Brexit) from the EU is to take place next week on June 23, 2016. Regardless of the outcome, the decision (which is too close to call) will contribute to our “geyser” thesis whereby the removal of the uncertainty will unleash a torrent of investor activity in either direction. The question we will explore in this blog is not to try and “guess” which side will win – this is futile in our estimation as we have no insight or edge – but how investors should act in the face of the unknown and unknowable. The answer of course is stick to what you know.
Here is what we know:
- Markets around the world have aggressively begun to discount Brexit. We see this clearly in a number of our stocks which have corrected 20%, with no change in the fundamentals or our investment thesis.
- Investors are scared: A flight to safety is in full swing with the yield on the German 10-year government bond going negative for the first time ever.
- In the U.S., the increase in the level of the VIX (a stock market volatility index and also known as a fear gauge) has been incredible. Yesterday, while the S&P500 was down only 0.81%, the VIX jumped 4 points to 21. With the VIX moving as much as it did, we would have expected the S&P500 to be down 3-4%
- The British pound is weakening.
- Credit indices are widening out, signalling investors distaste for risk.
We do not believe in making or reacting to macro calls on geopolitical events, and will not make bets on one outcome over the other. What we will react to is what we have control over, and in this case, we have limited U.K. exposure at this time because our investment process uncovered better risk/reward elsewhere. That may change. Regardless of which scenario plays out, we will continue to find and add to opportunities where valuations are compelling and risk/reward is favorable. In times when markets fear uncertainty and react to the unknown and the unknowable, we have trust and confidence and will not waver from our disciplined investment process to create alpha for our clients over time.