After two days of relative panic, global markets are beginning to return to normal following the U.K.’s surprising vote to leave the European Union, which would end four decades of membership of the free-trade area. The referendum result crushed the value of Britain’s currency to lows not seen since the 1980s.
The referendum result was seen as a monumental move by the U.K. to extricate itself from the superstate, which itself was developed in an effort to end the devastating wars between the nations of Europe. How Britain’s exit works out will depend on all the parties involved.
What should investors make of all this? No doubt, they were rattled. Among the worst-hit major exchanges were Japan and France, with key indices the Nikkei and the Paris CAC off 7.9 percent and 8 percent, respectively. London’s FTSE got away comparatively lightly, down 3.2 percent.
But the sell-off was likely just a knee-jerk reaction by traders who had not anticipated the “leave” vote. Indeed, most saw Britain voting to stay in the EU, albeit by a small margin.
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“The big question is what happens next because no one has ever left the EU,” says Martin Schulz, managing director of international equities for PNC Capital Advisors. In the short term, expect lots of volatility, particularly in the currency markets, he says.
“I would suggest long term you probably want to be invested in U.K. exporters,” he says. Britain’s currency fell so much that exports will now be far cheaper than they were just a few days ago. “Britain will compete better,” Schulz says.
That’s good because the country has some very high-class companies that export some value-added products and services.
One of Britain’s biggest exports in pharmaceuticals, such as those produced by London-based multinational AstraZeneca (ticker: AZN). Among other things it makes the antipsychotic drug Seroquel.
Another big export are products related to the aerospace business. Rolls-Royce, maker of aircraft jet engines among other things. (The famous cars are manufactured by German automaker BMW.)
And to cap it off, London is Europe’s financial capital. “City of London bankers have some of the best banking expertise in the world,” says John Tamny, scholar at Reason Foundation and author of “Who Needs the Fed?”
“The idea that EU companies would suddenly turn down their expertise is laughable,” he says.
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Some of the biggest U.K.-based banks include HSBC (HSBC), Barclays (BCS), and Royal Bank of Scotland Group (RBS). If Tamny is correct, such companies will continue to thrive and prosper.
Perhaps the best opportunities exist in those areas where stock prices have been beaten down, first by the uncertainty of the referendum itself, and then by the surprise outcome.
“U.K.-based companies are being penalized by this vote,” says Adam Johnson, author and founder of the Bullseye Brief newsletter. He says he scanned the U.K. market for companies that have good dividends that were likely to increase and were projected to grow their earnings over the next year.
“Nine out of 100 companies met my criteria,” he writes in a recent edition of the newsletter. Two of them — oil company BP (BP) and mobile phone provider Vodafone Group (VOD) — are traded as American depository shares in the U.S.
Such shares trade just like regular U.S.-listed shares and take some of the hassle out of investing in foreign stocks and serve as proxies for the so-called ordinary shares in the U.K., roughly the equivalent of U.S. common stock.
BP stock has a dividend yield of 7.4 percent, and Vodafone yields 3.9 percent. Both stocks also trade near their lowest level in three years, which is inflating the dividend yield.
Alternatively, for investors who don’t want to invest in individual stocks, exchange-traded funds offer exposure to a basket of British equities. The iShares MSCI United Kingdom (EWU), the First Trust United Kingdom AlphaDEX (FKU), and SPDR MSCI United Kingdom Quality Mix (QGBR) all have annual expenses of 0.8 percent or less.
Don’t panic. What’s very clear is that investors should not panic. That may not be easy because the headlines on TV and computer screens, plus those in newspapers regarding stock market sell-offs can be alarming.
The first thing to remember is that British motto: “Keep calm and carry on.”
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If you must touch your investments, then try shifting some cash from bonds into stocks. That may be emotionally gut-wrenching to do, but buying low and selling high is the way to get richer.
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After Brexit, Investors Should Keep Calm and Carry On originally appeared on usnews.com
