Value investors do everything they can to keep emotion out of the decision-making process, striving to tune out subjective feelings and focus instead on objective data – even with an issue as highly-charged as Brexit. We will take it as read many visitors to The Value Perspective will have strong opinions here one way or the other but, far from looking to antagonise anyone, we would argue it is possible to take a non-political view.
Regardless of where you stand on Brexit, it is hard to deny the question of whether or not the UK is part of the European Union is one of enormous political and macroeconomic significance. Just how significant – and indeed whether the political or macroeconomic element turns out to be the bigger concern – time will tell but, for a degree of perspective, investors can at least analyse the impact other historic episodes had on markets.
The following chart does just that, considering how the UK stockmarket fared one, three and five years after a dozen other significant political and macroeconomic events. These range from 1978’s Winter of Discontent through the Gulf and Iraq wars, the 11 September terrorist attacks and the collapse of Lehman Brothers to the referendum on Scottish independence in 2014.
As you can see, even after 12 months, markets were in positive territory in most instances – though not all. While the one-year pattern is mixed, however, for patient investors with a longer-term outlook – that is to say, with a three to five-year view – the outcome is very clear. With all of the momentous events listed – and we can hardly be accused of cherry-picking – markets showed positive longer-term performance.
The reason for this is that the stockmarket is intended to be a mechanism for anticipating the impact of big events and pricing in their potential impact in advance of them happening – providing, of course, that is possible. Investors had some opportunity to prepare themselves for the pound leaving the European Exchange Rate Mechanism, for example, but clearly not for the 11 September attacks.
As soon as such events have happened, however, the market is then meant to start looking through any current difficulty and assess what the future might hold once a more normal environment returns – what impacts might be temporary and what might be permanent? Thus, while the memories of what has taken place will of course endure, markets and economies do adapt; they factor in what has happened, they process the implications and they begin to recover.
So what does that mean for investors now? Well, regardless of the underlying reasons – concerns over the ramifications of Brexit would be one potential explanation – there is one fact about markets today that is not open to debate: as things stand, the UK is trading on one of the lowest valuations of all the world’s developed markets. The market has moved to anticipate potential problems – whether it has done so sufficiently, time will tell.
As we have explained many times, however, here on The Value Perspective, in articles such as Why value investing works, if you buy cheap companies then, on average and over the longer term, you will make money and, if you buy expensive companies then, on average and over the longer term, you will not.
That fundamental principle of value investing holds true – irrespective of anyone’s personal views on Brexit. As such, while the macroeconomic, societal and political impacts of Brexit are yet to be fully revealed, we are rather less worried about its market impact than all the media headlines would appear to demand.
As a Brexit-related postscript on objective facts and subjective feelings, here is an interesting little trivia question: of the 51 front-bench MPs in place at the time of the EU referendum in June 2016, how many are still in place today? At the time of writing the answer is nine. That is the fact – our feelings about the corporate governance of any business that saw more than 80% turnover on its board in just three years, we will leave to your imagination.