1430 Friday 16 November 2018

In many ways, I have often compared Brexit to the Millennium Bug in 1999. Going into the turn of 2000, there were headlines that claimed there could be shortages of food, global power outages and even planes falling out of the sky. And let’s face it, the Brexit headlines haven’t been too different. The common ground here, is that many of the scare stories are just that, scare stories, based on speculation and devoid of actual fact. Yesterday, however, provided us with some truths about how the market reacts to Brexit and any/all of the outcomes that may follow.

GBP Sensitivity

As Forex traders have seen since the referendum, days like yesterday can have striking results on the Pound. Volatility in EUR and USD pairs went wild, but in general, it was proven that negative news and uncertainty has an adverse effect on the GBP. At one point the GBP was down under/over 2% against several pairs in intraday trading, but while this generally sounds like bad news, some UK businesses benefitted greatly from the downturn.

Weak Pound – Good for (some) Business

The UK based business that export goods generally benefit from a weaker Pound, especially those that don’t rely so heavily from imported goods as components. The math behind this is quite simple; if the GBP is down, foreign buyers have more money to play with and can buy more. Two of the sectors that immediately benefited from this were the UK pharmaceuticals, of which GlaxoSmithKline are global exporters, and the mining sector with firms like Glencore and Rio Tinto. All of the aforementioned companies were up over 2% yesterday. The 3 best performers on the FTSE yesterday were the Smiths Group +7.91% (Manufacturing & Medical), Randgold Resources +5.72% (Mining) and Antofangasta +3.66% (Mining).

Weak Pound – Bad for (some) Business

In direct opposite to the firms mentioned above, the companies that rely upon domestically based sales got hit yesterday, especially those that import components to make up their goods. Many of the UK banks were easily identifiable as the losers of yesterday as their exposure to the Pound is vast which means that a downturn in GBP value, hits them hard. (Note – not all UK traded banks have such exposure to the GBP i.e. HSBC and Standard Chartered have strong ties to Asian markets). But no sector was hit as hard as the UK home builders. Several of the firms in this sector saw share values on or around 10% lower. And as alluded to, this is because the majority of their sales are domestically based and they rely on imported goods as components. These points were highlights by the FTSE’s biggest losers yesterday were RBS -9.33% (Banking), Taylor Wimpey -8.50% (Home Builder) and Persimmon -8.25% (Home Builder).

Trading the Next Headline Heavy Days…

Yesterday was a clear example of what the market does on days that bring uncertainty and instability, and it is fair to assume that there will be more of these days ahead as we could be facing a Conservative leadership challenge, we could see the current Brexit deal shot down by both the UK parliament and/or its EU counterparty as well as many others. Days like that may make a trader consider their portfolio and take a closer look at the companies they have positions in and their exposure to the GBP. As a general rule of thumb, portfolio diversification is a trader’s best friend as it helps investors protect themselves against the risk that volatile market conditions present. A wise trader should look at the effect yesterday’s events had on the market, look at what is ahead in the political situation and then strongly consider their portfolios. While there are risks in trading around the headlines, there are also clear benefits from both buying companies that benefit from a struggling Pound ahead of the dip and conversely buying on the dip when firm’s valuations fall in the immediate aftermath.

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