The article originally was suppose to be "Why the UK must vote Brexit, and here's how to play it", but I've gotten so caught up preparing my own trades for this cataclysmic event that I didn't have time to publish this article until 4am of the Brexit.
By now almost everyone knows what the Brexit is, but if for some wild reason you don't I'll sum it up in one sentence. It is the referendum put forth on whether the UK should leave the EU.
I have been following this very closely for months now. While I am an American, I pay a lot of attention to other political developments because I believe geopolitical developments have a great impact on my investments, and because they are usually very interesting.
Nigel Farage is the head of the United Kingdom Independence Party, and has been pushing for this referendum practically all of his political life. To see this referendum pass must be a dream come true for him. Farage is a huge Eurosceptic who has been fighting the centralized bureaucracy in Brussels for many years now. His brash, and unapologetic style is refreshing and I have taken a liking to him over the past few months. His videos ranting in the EU Parliament are particularly amusing, once saying that the President of the EU had "all the charisma of a damp rag and the appearance of a low-grade bank clerk".
I truly believed that Brexit was going to happen because many of the people in the UK are fed up, and Mr. Farage has been actively campaigning garnering a lot of support. You can verify this by checking SA as I have posted in threads about why they must leave and saying that they will. The Brexit voters were simply more determined than the Bremain vote. The torrential rain in the morning did not help the Bremain side, as many of the people voting to remain are millenials, and as we all know, millenials are inherently lazy. For the record I am for the Brexit, and if I were a UK citizen, I would have voted for it.
Here are a few bullet points why the UK had to vote Brexit in my view:
- Exports outside of the EU are greater than inside the EU
- The EU only accounts for 17% of the worlds GDP
- There is more trade to be had outside of the EU, which currently restricts trade and puts heavy tariffs on non-EU members
- The EU needs the UK more than the UK needs the EU
- Immigration has increased 10 fold
- There is now a lack of housing, and wages have been driven down
- 500 million EU Migrants can travel freely between the Euro without much scrutiny
- They will be regaining their national sovereignty, laws governing a country should be made in that country
- Intelligence agencies will not stop sharing information just because the UK leaves the EU
- Extradition treaties will be re-established and be just as powerful as the European Arrest Warrant
- The Southern Mediterranean has absolutely been decimated by the Euro, and the continuation of membership in the EU will lead to further integration, and further trouble for the UK.
- EU membership is costly
- The British not only survived, but thrived for hundreds of years before the existence of the euro
- The mission of the EU has shifted from an economic union, to a political union
- This vote is not just about the UK, but a vote on whether to continue with the failed European Project or to end it in its entirety
Now that we have finally gotten the political commentary out of the way let's look at some investment options following the fall out. Many of these are going to be hard if you did not set these trades up beforehand believing there would be a Brexit, but regardless I believe they are still doable.
Short the Pound: This is the first and most obvious choice. The pound had made a nice little run up into the referendum as most people thought that the UK would choose to remain in the EU. It had rallied form 1.40 all the way up to 1.48, only to fall over 10% after the news broke of Brexit down to 1.35. That's the lowest the pound has been valued at in over 30 years! While I think this is something you had to be positioning yourself for, I think there is still some room to short the pound. The pound has already begun to move from 1.35 back up towards 1.37, but when the US markets open tomorrow, US investors may start dumping the pound like there's no tomorrow. So in this case, the early bird really does get the worm, and you can still make some money if you're getting in your orders before everybody else. Many Wall Street analysts have the pound falling below 1.2. While it looks like the pound is recovering for now I don't think we can fully say that it has priced in the leave from the EU. Once more news emerges and the UK heads towards a possible (temporary) recession as it begins re-negotiating trade deals and figuring out legislation, I believe the pound will continue to fall. While the big move was from 1.48 to 1.35, the even bigger move could be from 1.37 to 1.2 or even lower. This trade definitely still has some legs, and getting in on it during the very brief relief rally in the pound may play out nicely for the more savvy investors.
Buy Precious Metals: In times of economic uncertainty people rush into precious metals. I suggest buying Gold (NYSEARCA:GLD) and Silver (NYSEARCA:SLV). People have already been buying up gold this year like it's going out of style, and I believe the trend is going to continue in a major way.
If you look at this week, there was a big dip in gold before it exploded on the "unexpected" Brexit news. I will zoom in on that for you. You can tell that Gold was not priced in for the Brexit. Many of the polls had Bremain winning, and so most investors put their money into equities expecting the broader market to rally once Bremain one. The aggressive short covering and rotation into gold resulted in the monster jump.
Buy the Dollar: The UK just left the EU and the pound is falling like crazy. Now, the certainty of the EU is in question and people will begin dumping euros tomorrow as well. The safest currency in the world are probably US dollars, and investors will probably begin buying up these safe haven assets as a hedge for what's going on in their own country, because the economy in the US is still faring better than that of Europe, and because they expect other investors to pile in and are hoping to make money off of that. The Dollar Index had hit a high of 100 a few months ago buy has since retraces back into the low 90s. However, on news of the Brexit it shot up to 97. It has since fallen back into its comfort zone of around 95. I say comfort zone because this is the level it has liked to trade at the for the past few months give or take.
Buy Vodafone: This last pick seems like it's coming out of nowhere right? During these volatile markets, many have been turning to blue chip dividend stocks to whether the storm like AT&T (NYSE:T) and Verizon (NYSE:VZ), but another well run telecom is Vodafone (NASDAQ:VOD) which I recently initiated a position in a few months ago. They have a lot going for them. They sold off the rest of their stake in Verizon Wireless a few years ago, giving them a ton of cash. They are rolling out LTE across Europe, which is much more advanced than most of the other cellular networks there. Its Indian unit, which is gigantic, is being ready to be IPO'd which should bring in a lot of money as well. Finally, Vodafone is merging its Dutch operations with Liberty Global's (NASDAQ:LBTYA) subsidiary in the Netherlands. They are also continuing to grow into India, Africa, Eastern Europe and Asia specifically in Turkey. They are launching HBO in Spain, and just bought Sky Network in New Zealand. Vodafone is continuing its international expansion at a rapid rate. The management just seems to be doing everything right, and the company seems to be firing on all cylinders. There was a slight drop in revenues due to foreign exchange movements, which as we talked about earlier has been a big theme this year. The good news is that most of Vodafone's revenue comes from outside of the UK, so while the drop in the pound will have an effect on revenues, it won't be the be all end all. Regardless if revenue drops again the company is a great conservative pick churning out a 5% dividend, with strong cash flow, and low debt. The stock is also trading well below book value and has the lowest debt to EBIDTA at 1.9x vs. all the major European Telecoms. The company is trading down with the broader market this morning down 6% as I suspected, and you should use this as an opportunity to buy some shares.
Conclusion: You don't need to fear financial collapses or market corrections, embrace them. There is always money to be made. The only thing you should be scared about is not having the proper game plan whether you're a conservative investor or a professional trader/asset manager.
Disclosure: I am/we are long T, VOD, GLD, SLV.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am short the British Pound, and long the US Dollar