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Equity markets after Brexit


Equity markets have unsurprisingly been volatile since 24 June as investors have grappled with the uncertainty caused by the outcome of the Brexit vote. The immediate impact was a widespread sell-off in stocks with revenue exposure to the UK and Europe and particularly the UK’s mid-cap and small-cap indices, although these have recovered somewhat in recent trading sessions.

Banking and real estate stocks have been most in focus, reflecting investor concern over the likely impact of Brexit on interest rates, economic growth, house prices and access to the European market. However, the FTSE 100 continues to be buoyant due to the substantial weakness in sterling, which stands to benefit most of the companies in the index given that they earn most of their revenues outside the UK.

So how should an active, value-focused investor interpret these signals? The recent weakness in equity performance and indiscriminate selling of mid-small caps has exposed value opportunities for institutional investors. While not cheap, the average UK stock is certainly less expensive than pre-Brexit. However, the importance of stock picking is crucial though to identify genuine mispricing opportunities rather than value traps. While the future is uncertain and is expected to hinge on political developments as they emerge, any shorter term volatility is likely to present selective opportunities for long-term investors who are willing to take advantage of attractive valuations.

The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested.

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