Brexit can perhaps be seen as an example of the ‘availability heuristic’ for investors. This describes the mental shortcut that relies on immediate examples that come to mind when we are trying to evaluate a specific topic, concept, method or decision.
Essentially the more newsworthy, or simply recallable an event or process is, the more importance we’ll tend to give it when we are making a related decision. Brexit is such a seismic event for citizens of the UK, that it may feel bizarre not to give it the same degree of importance in our investing lives.
The media, of course, can help further this sense. They are bound only to report on the ‘interesting’ stories rather than proportionally promote the important ones that will make us more clear-headed and successful investors - there would surely be a revolt amongst media sector shareholders if management decided to pursue the latter policy? Anyway, Brexit has proved itself to be a very interesting story and will likely continue to dominate the newswires for the foreseeable future.
Look through the noise
However, from a capital markets perspective, much of the bad news is now priced in. A reasonably well covered dividend yield of nearly 5% for the FTSE 100, suggests value if doomsday does not arrive as we still suspect. There are certainly headwinds for FTSE outperformance beyond Brexit. The index composition remains too defensive for those looking for exposure to an economic cycle that retains a healthy pulse. Besides which, the commodity exposure, usually a source of a decent cyclical boost, looks unlikely to be a source of much earnings cheer for now.
However, patient value investors who actively seek stocks which they believe the market has undervalued will like the dividend and should warm to the fact that this payment has historically grown at around the pace of global nominal GDP. Note that past performance is not a guide of future performance. Nominal GDP refers to economic output which isn’t adjusted for the effects of inflation. High single digit annual percentage returns are not to be sniffed at in a world where long end gilts, or high-quality government bonds, are still struggling to provide inflation-beating returns.
Sterling certainly will have a role to play in the short run. If sterling moves above its post-Brexit range, company profits earned overseas and brought back to the UK may fall in value, but likely only temporarily. This is close to irrelevant from a transactional perspective as most of these companies are not manufacturing in sterling and selling in other currencies. For those able to look through the noise, some exposure to UK assets will continue to provide important diversification, and in the long term, return for investors.
“For those able to look through the noise, some exposure to UK assets will continue to provide important diversification, and in the long term, return for investors.”