This coming Thursday, June 23, British voters will vote whether or not they to remain a part of the European Union. As usual, the vast majority of articles concerning how the Brexit, which from recent polls appears likely, will affect US equities, from the point of view of the common shareholders without much notice given their preferred cousins. This article is specifically written with the interests of the preferred shareholder in mind.
Let's begin by monitoring and assessing the predictions of several reputable journals and their reporting of the Brexit and its potential affect on England, the EU, the global economy, and more specifically the US market.
According to the Guardian:
Indeed, we sometimes wake up to important global economic events - the near implosion of the European Union due to the catastrophic economic problems in Greece and the related problems in countries like Spain and Ireland; China's slowdown - only when spills over into our own world.
That's why polls showing the Brexit vote may result in a majority of Britons voting to leave the EU are only now starting to rattle US financial markets, months after British and European stocks and bonds began feeling the chill.
Laurence Wormald, head of research at FIS, a financial technology company, has run a "stress test", or a hypothetical scenario analysis, and calculated that if Britons vote in favor of Brexit, the S&P 500 would fall 5% and banking stocks would fall 8%, while volatility in the broader stock market would soar 40%.
If such a Brexit vote prompts other anti-EU parties in other countries to renegotiate their relationship with the European Union, that would create what FIS refers to as "exit contagion". That would send British stocks down 20%, European stocks down 15%, and US stocks down 10%; volatility in British and European markets would double, and in the US market it would soar 60%. That would make the stock market a very, very uncomfortable place to be for the remainder of the year.
What is Brexit and why does it matter? The EU referendum guide for Americans
It's a particularly costly problem for the banks, since London - despite fierce and combative efforts by Milan, Paris, Frankfurt and Dublin - clearly has become Europe's financial center.
A piece on Townhall, a political commentary Website, quotes U.S. Treasury Secretary Jack Lew as saying that "I see only negative economic outcomes. A Brexit would also put geopolitical stability at risk."
The Townhall column also quotes JPMorgan Chase CEO Jamie Dimon saying that Brexit would seriously hurt not only his company, but also the global economy. At a minimum, he has said, a "Brexit will result in years of uncertainty and I believe that this will hurt the economies of both Britain and the European Union."
No doubt, the U.S. investment markets have agreed with Lew and Dimon with a rush of money in recent days into safe havens like U.S. and German government bonds following news that the polls were indicating a June 23 victory for the "Leave" side.
"In the short-term, it is possible that some sectors in the U.S. would gain, particularly in finance with New York and Wall Street gaining…a firmer foothold against London as the global financial capital," writes Brookings' Aaron Klein and D.J. Nordquist.
They add: "While it is unlikely that many firms would leave London entirely, they would probably scale back considerably, both now and in the future."
But the Brookings' researchers go on to say that "Brexit would lead to a global fall in equity prices as investors fear the impact the vote could have on Britain's economy, and could spell the first falling domino of European Union disintegration."
But the piece, written by Bloomberg's former top editor, Matt Winkler, suggests that investors who make long-term bets aren't that worried about the vote next week.
That's the bad news. According to recent polls, the British voter will most likely vote to leave the EU. Furthermore it will negatively impact the global economy and the markets. Worse case scenario, if other disgruntled EU member states decide to follow the British example and also exit the EU, the impact on our market can be compounded and exacerbated with volatility reaching as high as 60%. Should the worst happen, be prepared for a very bumpy ride.
However, this could be a double-edged sword, one side hurting while the other helps the preferred investor. Or should I say the preferred investor with nerves of steel. For in the short-run, or possibly longer than that, our portfolios are going to quite possibly take an enormous hit. Most of us will forget that the losses we suffer will, in fact, be unrealized losses, that is, if we choose not to sell. And here I have to leave that decision to you because it's your money not mine that's at risk, and only you can decide how to deal with it.
Frankly, I don't even know what I will do, but I have some thoughts I'd like to share with you, and hopefully get your feedback. I'm not seeking debate, rather a frank discussion of the possibilities of alternative approaches. I am of two minds at the moment. The first is to sell now and wait for an opportune moment to buy back at a substantially lower price. The second is to hold because preferreds might not be as severely affected as the commons, and when the smoke clears and the dust settles, jump in and begin buying those issues that I hungered for, yet felt the price to high and the yield to low for as long as I've been watching them.
Because ultimately, the silver lining for the preferred investor are buying opportunities across the board; opportunities so plentiful that even Jill would find them too hard to resist. Personally, I'll be looking to further diversify my portfolio and pick up some of those safer preferreds I normally ignore because their prices are above par or simply too high, and consequently their yields too low.
In conclusion, we are rapidly approaching a time of potential extreme volatility that will make cowards out of heroes and try our investment souls. The market, as it will, will make geniuses idiots, and idiots geniuses. At this moment, I sincerely don't know which path I'll travel, I just hope I end up one of the geniuses that profited, not the idiot that lost.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.