Wow. Narrow victory for “leave”. I didn’t expect that.
Nor did the markets. That’s why they’re crashing even as I type. That’s why the pound is at its lowest level since the miners’ strike.
Here’s what you do now.
You don’t panic. You keep the head. You take deep breaths.
And you look out for opportunities…
This is a beginning, not an ending
The first thing to remember, as you gaze at a screen filled with red, or listen to pundits on the radio and telly working themselves into a lather of existential horror, is that this is not necessarily the end of Britain’s relationship with the EU. It’s more like a starting point for negotiations.
The Channel Tunnel didn’t cave in last night. The British population just said that they don’t want to be part of the EU in its current format.
It was a good turnout. And it’s a victory for “leave”, no question about it – I’m not downplaying it for a minute. But it’s a narrow victory – 52/48.
If this had happened a week and a half ago, when all the polls were showing “leave” to win, the reports would be “Leave has won – but only just”, as opposed to “OMG Leave has won, the world is doomed”. The market and the assembled punditry just got ahead of themselves.
And before anything can happen, someone (clearly not David Cameron now) has to invoke Article 50, which is how a nation leaves the EU. That almost certainly involves a vote by our politicians.
After that, even if they invoke Article 50, you have at least two years in which everything stays pretty much the same as it is now.
I suppose my point is this: don’t expect parliament or Europe to jump to it and just get on with leaving, simply because the voters have asked for it.
Politics is the art of fudge. And even this result leaves plenty of room for fudge.
How that fudge will be conducted will start to become clearer throughout the day. Don’t be surprised if there’s a lot of tough talk from Europe at first. There’s an election in Spain on Sunday and they might imagine that taking a hostile line will somehow swing it their way.
(Personally, I’d suggest that the political lesson from this is that taking a less adversarial approach to the populous is probably the way to win hearts and minds, but I don’t know if that’s getting through yet.)
But I still wouldn’t be astonished to see a second referendum being held at some point. The EU does have form on that front.
And you have to remember – this is an existential issue for the EU too. It’s pretty clear from polling that a sizeable minority (or maybe it’s a majority, given how unreliable the polls seem to be) of the population in pretty much every EU country is keen to leave.
If Britain is allowed to go ahead, then anti-EU parties will do well everywhere. People talk about “punishing” Britain pour encourager les autres. But believe me, the results of said punishment will not become apparent in time, and the EU knows it.
While Britain is negotiating its way out over the next two years, that gives plenty of time for unpredictable elections, referendums, campaigns and the rest of it to happen in other EU nations.
If the EU wants to survive, it has to find a way to make this work now. It doesn’t have the luxury of time, or of giving Britain a long, drawn-out kicking.
What this means for your investments – get your head into “buy” mode
From an investing point of view, I think it makes sense to prepare your head to get into “buy” mode. This time yesterday – in fact, this time last week – markets thought it was all over, and they got overexcited.
Sterling rocketed and stocks rebounded hard. Today, sterling has collapsed and the markets have opened sharply lower too. But a good chunk of that is “remain” over-exuberance being washed back out of the price.
Yes, sterling has tanked, and it’s a historic move that I really, really would not want to have been on the wrong side of.
But do bear in mind that at the start of the week it was sitting at $1.39/$1.40. Today’s pile-up looks even worse than it really is, simply because the markets had taken it for granted that “remain” would win.
Also, if Brexit means nothing else, it certainly means looser monetary policy for longer. Markets can’t help but respond to that.
As for the FTSE 100, which crashed hard at the open, for many of the biggest stocks, the slump just doesn’t make any sense. A huge chunk of their earnings are in dollars (so a weak pound is largely helpful) and most are global companies.
I’m going to be eyeing up the miners (no real consequences from Brexit) in particular. I’d suggest that you break out your own watchlist, and also look at any stocks that you already own that you’d hoped to top up on – this could be a good opportunity. I won’t necessarily buy today but I’m certainly looking to buy rather than sell.
All I would say is that if do decide to buy or sell anything today, keep a close eye on execution – things like spreads etc. It might be busier than usual.
Most importantly – hold your nerve. This is the initial panic reaction – sell first, think later. But markets are nothing if not opportunistic. As soon as the odds are recalculated, and investors get a grip again, I suspect a lot of this will unwind.
And if you’re holding gold (as we’ve always advised) then at least one corner of your portfolio is hugely offsetting any damage you’re seeing elsewhere.
Later today, I’m going to be doing a podcast with Merryn, so look out for that on the website. And for MoneyWeek subscribers, we’ll be rushing out a brief special report – I’ll aim to have that with you over the weekend.
Remember: above all, this is the time to keep your cool. Don’t buy or sell based on emotion. If the news is stressing you out, switch it off. If watching the market is making you panic, stop watching it and read a book. You won’t miss anything important.