Thursday night we all went to bed wondering what the Brits would do and Friday morning we awoke to find out. Voting to leave the eurozone surprised investors as stock prices steadily rose through the close of trading on Thursday. In short, stocks were poised to fall in the event of a Brexit victory. Did you receive client calls Friday? Were your clients concerned?
Quite surprisingly, I only received one client call Friday, and that was from a client who is going to need money to close on a land purchase in the next few months. Beyond that, I didn’t receive any other calls. I also didn’t wait for them to contact me. Instead, I sent an email to all clients with my perspective on the situation. This probably helped, but there may be other reasons for the silence. For example, last September-October I exited all foreign investments. In addition, we have been holding a fair amount of cash, so this downturn may be exactly what the doctor ordered.
Perhaps the most important lesson I’ve learned over the years is this: Some of the best investment opportunities are found after a market dislocation.
Why? When fear rises investors sell their risk assets and the decline is often more severe than conditions warrant. Even though Great Britain voted to leave the EU, it hadn’t converted to the euro, but were still using the pound. Moreover, there is no cohesive fiscal policy among Eurozone members. There is with monetary policy, but not with fiscal policy.
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Therefore, EU member countries can act with as much reckless abandon as they wish, financially speaking, and the European Central Bank will feel some obligation to bail them out member countries the event of a crisis. The Brits may actually be better off as a sovereign nation than as a member of the EU. Of course, this assumes the U.K. will be able to negotiate new trade agreements.