The Brits have really done it. In a stunning upset, British voters indeed voted for severing ties with the European Union. The 'leave' camp fought as fiercely as the 'remain' camp, trying to woe voters, but at the end of the day EU opponents prevailed in yesterday's referendum that caused celebration on one side, and doom-and-gloom on the other. Consolidating 51.9 percent of the vote, the 'leave' camp won the historic referendum that is putting Britain on a new path. Brits have reasserted their sovereignty and right to self-determination, but the vote comes with a couple of downsides...the financial markets are already reacting: European stock market indices in London, Frankfurt and Paris dealt major losses to investors on Friday.
U.K. prime minister David Cameron announced that he will be stepping down, paving the way for new leadership. The pound slumped to a more-than-thirty-year low against the U.S. dollar after the Brexit was sealed in Thursday's referendum. Further, U.S. stocks are also going to open much lower on Friday.
Chances are, however, that investors will be overreacting to the Brexit vote. The U.K. economy may grow at a slower rate, inflation may rise, and the British currency may drop a little further, but U.S. companies, for the most past, should be doing just fine, even though shares may get clobbered in the short run.
Brexit Is A Golden Buying Opportunity
The referendum outcome is likely to lead to lot of panic selling in U.S. stocks, including income vehicles, many of which I have recommended to buy. Business development companies including Triangle Capital Corporation (NYSE:TCAP) and Prospect Capital Corporation (NASDAQ:PSEC) are two companies in the BDC sector that should be on every investors' shopping list when investors fall over themselves today in order to get to the exits.
Take a look at Prospect Capital, for instance. The business development company's shares have run back up to almost $8 lately on improving investor sentiment, but they will likely be hit hard when markets open on Friday. Right now, Prospect Capital's shares are selling for 82 cents on the dollar while the company continued to cover its dividend with Net Investment Income in the last quarter. An 18 percent discount to Net Asset Value is nothing to scoff at, but shares are likely going to edge lower today on an expected emotionally-fueled market sell-off. If I can buy Prospect Capital at an even larger discount to NAV, the better.
Cash Is Going To Be King
You will be in a good position to take advantage of the market slide if you have a sizable amount of cash on hand. I expect the financial markets to remain very volatile after the referendum, and a lot of bargains in the high-yield market segment to wash up in the near term as well.
Every large-scale sell-off in the U.S. stock market thanks to a European trigger event creates a buying opportunity for U.S. income investors. Besides Prospect Capital and Triangle Capital, I think Starwood Property Trust (NYSE:STWD), Realty Income Corp. (NYSE:O) and New Residential Investment Corp. (NYSE:NRZ) are other income vehicles that are worth keeping a close eye on in light of the expected market slide.
U.S. markets will follow today's market meltdown in Europe on the back of the Brexit referendum, and there will be a lot of emotionally-fueled selling that has little do with the earnings picture of U.S.-based REITs, BDCs, and mortgage investment companies. As a result, the Brexit will most likely create a bunch of buying opportunities for clear-headed income investors. Prospect Capital, Starwood Property Trust, and New Residential Investment are three high-yield stocks that are on my shopping list heading into this correction. Buy for income.
Disclosure: I am/we are long PSEC, NRZ, STWD, O.
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.