Brexit implications for the SG investor

83) Brexit Britain flag.jpg

Brexit is in the news. The British heads to the polls in a referendum this coming Thursday 23rd June 2016, to decide if they still want to be a part of EU.

How would Brexit affect the typical SG investor?

The same way it affects the whole world apparantly. Greatly.

Now, I have no opinion on Brexit. No idea if it’s good or bad for the British in the long run. Fortunately, I don’t need to know, and frankly, I suspect nobody really knows.

The LEAVE camp will cite many reasons for Brexit. Britain now sends more $$$ to the EU than it receives. Free borders and immigration has always been an issue for London, and the populace in Britain no longer have the patience to tolerate EU’s rules, especially since they do not directly see any economic benefits.

The STAY camp will cite economic benefits mainly. An integrated market for Britain’s goods and services. In response, the LEAVE camp says that after leaving, they have the flexibility to directly negotiate Free Trade Agreements with other countries like the US, and even the EU themselves.

I have no idea whether leaving or staying is good for Britain in the long run. As an investor though, all I’m interested in, is how Brexit will affect my investments.

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The poll results are binary; there’s only a LEAVE or REMAIN. You can’t end up with a result that’s in the middle. What this means for our investments is that the effect, whether positively or negatively, is dramatic. You can either be right or wrong. If that’s not acceptable, then one can simply position your portfolio to include longs and some smart shorts. In other words, you’re accepting that you’d be at least partially wrong.

Everyone agrees at least, that if the LEAVE camp wins, in the short term, the global markets will be rattled. Markets will bleed red and volatility will spike. (A good way to play the volatility if one chooses to, is via the VIX).

On the contrary, because markets have recently priced in a potential Brexit, due to the LEAVE camp coming out ahead in opinion polls, if Brexit doesn’t occur and the REMAIN camp wins, one can expect the global markets to rally in the short term.

So as you can see, it’s rather binary in the short run. On Friday, the markets can either drop or rise substantially depending on the results.

If one expects Brexit to win, it makes sense to now build up short positions, or bet on the VIX, divest holdings etc. Vice versa is true.

My Thoughts

Although recent opinion polls put the LEAVE camp ahead, I personally think come Thursday, the British will vote to remain in EU.

I just don’t see 64 million people failing to see the danger of breaking up EU. Yes, not just leave. If the British does leave, I think it will set off a sequence of events leading eventually to the falling apart of EU.

On top of that, policymakers have their hands tied when it comes to stimulating the economy and backstopping contagion. Interest rates are at all time lows globally. Negative interest rates no longer raise an eyebrow.

Brexit will create more problems than short term volatility. It may even be the trigger for the next GFC.

I still hold on to some shorts that are currently profitable. I’d be likely to exit those positions before Thursday though, and my overall portfolio would then be net long. If the REMAIN camp wins as I expect them to, and the markets rally sufficiently, I’d likely start adding back my shorts on the major indices, probably S&P 500 and the Nikkei.

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