The old adage, “markets take the stairs up and the elevator down,” certainly seems appropriate in light of the UK’s referendum vote to leave the EU, or Brexit, last Friday. Let’s not forget it was just a year ago that Greece’s own referendum on EU membership was on the table, albeit with the focus on the single currency, which of course, the UK never adopted. The world at that time had at least semi-prepared for the impact of that decision. That was certainly not the case with the UK, where many were caught off-guard after the results of the Brexit Referendum. The political and economic questions surrounding the world’s 5th largest economy are numerous with the resultant uncertainly throwing not only the EMEA markets into a tail spin but causing reverberations around the world.
Looking at the markets’ response last Friday, it makes perfect sense the biggest impact was felt in the currency markets as evidenced by the massive drop off of the pound vs. the dollar (and the yen and the franc.) But the sheer scope and magnitude of these events cuts across all geographies, strategies and industries.
Using AlphaSense, we looked at some other markets to see YTD performance following the voting results, and the number of mentions the terms, “Brexit” and related market keywords returned in our search.
Two Key Points from the Data:
- There is an enormous amount of commentary on the effect that the Brexit vote will have on the emerging markets. Using the AlphaSense Smart Synonymsm feature, we are able to capture specific commentary on the effect of any possible deglobalization may have on specific countries such as China or Brazil. A quick review indicates that other than the initial risk aversion trade, direct exposure to the UK is limited and exports to EMEA based economies accounts for only 4% of EM GDP. However, the prospect of long-term growth in export-centric China (search: “China” AND “Trade”) could be effected by an economic slowdown in Europe.
- The initial reaction on the effect of the European real estate market was substantial. It goes without saying that any possible migration of jobs out of the UK and London in particular, would have a profound impact on the UK real estate market: Commercial, industrial, retail and home-builders. Land Securities PLC (London: $LAND) and British Land PLC (London: $BLND) saw meaningful declines last Friday while Foxtons Group PLC (London: $FOXT), a prominent London-based property broker, has already issued a profit warning. REITs on the other hand, countered that trend given their relatively low exposure to EMEA, anticipation of no rate hikes this year and ‘safe-haven’ status. Favored sectors / names have included:
- Healthcare (Ventas $VTR, Physicians Realty Trust $DOC)
- Office (Boston Properties $BXP)
- Multifamily (Camden Properties Trust $CPT)
Given the events of the past few days, it’s clear that risk aversion, capital preservation and higher volatility will be the norm for the foreseeable future. With new developments happening every hour it seems, staying “in the know” will be as important as ever. For value investors looking for bargains, understanding the macro environment through rigorous qualitative research will be an exercise of paramount importance (and patience).