The Brexit Vote Is A Buying Opportunity - Here's Why

| About: iShares MSCI (EWU)


Brexit passed with just a 3.8% margin of victory, about the margin of error in most polls.

The danger of the Brexit vote is that EU officials will punish Britain to keep others countries from departing. That would hasten, not hinder, other departures.

Today's market declines are largely a function of the failure to properly judge the Brexit vote. It has created a risk-off environment that has exacerbated the sell-off.

The UK can ameliorate Brexit angst by signalling it will adopt EU policies for 3 to 7 years; then, become an EU "Cafeteria Member", abiding only EU rules it likes.

Overall, the market uncertainty creates a buying opportunity because Brussels and Angela Merkel have been chastened. For all intents and purposes, the UK effectively remains in the EU.

The effect of the Brexit vote has been widely overstated. Even the IMF has engaged in a bit of fear mongering, as has President Obama with an absurd threat that a Brexit vote would put the UK "at the back of the queue" for negotiating trade treaties with the US.

The fears are not justified.

The Vote

First, the vote favoring Brexit was largely about immigration. Brits, like their American cousins, have grown tired of all-but-open national borders.

Second, it was about stagnant economies in Wales and the regions of England outside London, as indicated by regional voting patterns.

Finally, it was about a resurgent sense of nationalism and populism that this author identified in this blog post two years ago, when Eric Cantor lost his primary vote.

The Market Effect

But the failure of the marketplace to judge the vote correctly, and assume that the Brexit vote would be to remain, has caused a market sell-off.

That error in judgement (London bookies had put the chance of a "leave" vote at just 25%) and the uncertainty of the outcome of Brexit has resulted in a risk-off environment that has exacerbated the stock sell-off, notwithstanding individual stock and sector fundamentals.

What's Next

The Brexit vote Triggers Article 50 of the Treaty of Lisbon, and commences a period of negotiations between Britain and the European Council that can last up to two years, after which time the departure occurs automatically unless the Council and Britain agree to extend the period. (The reform agreement negotiated by David Cameron's government that would have taken effect had Britain stayed in the EU has been nullified.)

The real risk, going forward, is that other countries may leave the EU, as polls indicate.

If Jean-Claude Juncker and other leaders of the EU attempt to punish Britain in the upcoming Brexit negotiations, it will hasten, not hinder, EU exit movements in other countries. It's the fear that there might be a rapid disintegration of the EU that has created the greatest concerns among investors.

Why the Fears are Overblown

UK GDP grew by 0.4% in 2016Q1. FTSE stocks are down just around 3% for the day. Brexit did not pass overwhelmingly; "leave" won with a margin of just 3.8%, about the margin of error in most polls. The country has its own currency and has natural borders. It is the second most productive country in the EU after Germany.

All those factors point to a very accommodative departure and far more pliant Parliaments - in both London and Brussels -- than some anti-establishment Brexit advocates had hoped.

How Investors Can Benefit

I predict that Britain will adopt EU rules and policies as their own for the next several years, before trimming or replacing them to its own taste over five years to a decade or so. Thus, the effect of Brexit would be indiscernible for at least the next several years.

The EU's bureaucracy, has been chastened and will likely be dissuaded from some of its more overreaching policies. (That goes, too, for Germany's Andrea Merkel's pro-immigrant policies.)

In my opinion, the GBP and the FTSE will rebound within weeks, perhaps even days, so that concerns about the wealth effect for UK consumers are far overblown.

FTSE shares represent a buying opportunity for contrarians. The global investment community has panicked and bought into a good deal of media hype (that has come about largely to counteract the media's prior failed guidance in which it said Brexit was "unlikely".)

Don't buy into the fear or the uncertainty; instead, profit over the medium to long term. Go long on UK ETFs like (NYSEARCA:EWU) and other high-quality, widely traded, UK stocks.


Author's note: My commentaries are mostly in the consumer discretionary space and, most often, tend to be event-driven. I also write mostly from a management consulting perspective for companies that I believe are underperforming; that is, I sometimes lay out strategies that I would recommend to the company to improve its business and strategy were they my clients. I think this approach lends special value to contrarian investors who see the opportunities that I do in companies that are otherwise in downturn. My opinions with respect to the company here, however, assume the company will not change.

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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.

Additional disclosure: The views expressed are the opinions of the writer and do not represent, and should not be considered to be, investment advice. You should not use this article for that purpose. Before making any investment decision you should consult your own business, legal, tax, and financial advisers.