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Putting Brexit moves into perspective

June 2016
3 mins. To Read

Brexit is not cause for panic

The UK’s vote to leave the European Union surprised markets and caused considerable volatility. We had no edge in predicting the vote’s result, and we have no edge now in predicting its broader implications. Trying to game these things is just too hard, and fraught with danger. The experts often get it wrong. And in our view, stances on events such as this one are not necessary to deliver good results for clients. In times like these, we keep a cool head and play to our strengths. We maintain our long-term perspective, and we remain focused on the relationship between the price and value of individual securities.

The main question for us is not what will happen to European politics or the UK economy, but whether individual companies look like good long-term investments at the prices the market is offering us. We believe the best tool to answer that question is bottom-up, fundamental research. For some shares, assessing the political and economic risks of Brexit forms part of that research, but we spend much, much more time looking at financial statements and the drivers of individual companies’ earnings.

We cannot control how the market reacts to major events, but we can control how we respond. Aware that opportunities could emerge in the event of a vote to leave, we reviewed our investment ideas and re-affirmed our estimates of intrinsic value so that we would be able to take advantage of any dislocations. For the overwhelming majority of our favoured securities, we do not see a clear impairment to long-term intrinsic value as a result of Brexit, though the resulting uncertainty may make for uncomfortable share price movements in the short term.

Putting recent price movements in perspective

The “leave” vote did not come out of thin air. The referendum date had been set for 23 June. Governments, central banks, businesses, and investors have had time to prepare. But while the referendum’s result was uncertain, investors appeared confident that Britain would vote to remain in the EU. This can be seen in the chart, which shows market movements in the days before and after the vote. Leading up to 16 June, polls had shown “leave” ahead, but between that date and the referendum, polls suggested increasing strength for “remain”, and investors responded positively. This misplaced confidence likely exacerbated the sell-off last Friday. When minute-to-minute moves are driving sentiment, looking back even a few weeks can help to provide perspective. Price changes over the past few weeks were much less severe than the one-day numbers which dominated headlines.

A longer-term perspective is more useful still. The FTSE 100 (in GBP) and MSCI World Index (in USD) are down less than 10% from their all-time highs set in 2015. Developed world stockmarkets appear fully valued in aggregate, yet with record low yields on government bonds, even fairly expensive stockmarkets still hold some appeal for investors.

At times like this, we are especially glad to be bottom-up investors. Our philosophy lets us focus on a relatively small number of ideas and invest wherever we find undervalued securities. We try to use any short-term market dysfunction to opportunistically add or trim holdings, and we have done so on this occasion.

Sticking to our knitting

“What happens next?” has been a common headline over the past week. We don’t know the answer, but we are confident that we can deliver better results on your behalf by remaining focused on the long-term fundamentals of individual companies, some of which are discussed in this quarter’s commentaries.

This Report does not constitute advice nor a recommendation to buy, sell or hold, nor an offer to sell or a solicitation to buy interests or shares in the Orbis Funds or other securities in the companies mentioned in it (“relevant securities”). It has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Orbis, its affiliates, directors and employees (together, the “Orbis Group”) are not subject to restrictions on dealing in relevant securities ahead of the dissemination of this Report. Subscriptions are only valid if made on the basis of the current Prospectus of an Orbis Fund.

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