In or Out: Savvy Investors Should Respect, Not Fear, Brexit

On June 23, the United Kingdom will vote on a referendum that calls for the United Kingdom to leave the European Union. The polls have been tight, but shifting ever so slightly in favor of leaving the EU. Economists, portfolio managers and traders (and pollsters) are continually scratching their heads and tinkering with models trying to forecast the outcome. A British Exit (or Brexit) could spell future trouble for the entire union as well as for the UK. Making matters more complicated, was the hideous murder of Jo Cox, a British Parliamentary member. With calls to temporarily suspend the campaigning for the BREXIT vote, in view of the Cox tragedy, the forecasting job becomes even more difficult. But a poll, taken after the vicious murder, showed those who favor leaving the EU gaining against those who want Britain to stay.

The stakes could be very high for investors. The last time there was a market shock by a European country was when the Swiss National Bank (Switzerland’s equivalent of our Federal Reserve) removed the trading peg for the Swiss Franc against the Euro. The Swiss Franc initially had an extremely violent move of nearly 30% (it later gave back more than half the gain). The Swiss Stock market tanked and investors/traders who were on the wrong side of the trade had staggering losses.

As one person said… follow the money. Problem is, sometimes the money bets wrong – great hedge funds and bookmakers sometimes get it wrong. Truth is, no one knows what is going to happen with any certainty. However, over the long run, the healthcare sector has been a great place to be invested—especially in market turbulence. Ideally, you want to be in stocks that give solid market returns in good markets, but outperform when the market swoons. An ideal situation to study this is the financial crises of 2007-2009. (See table below for the performance of the healthcare sector versus the S&P 500 during this violent and prolonged bear market).

Stock or ETF High Price 2007-2009 Low Price 2007-2009 Approximate % decline
S&P 500 ETF (SPY) 155.00 73.93 -52.3%
Health Sector ETF (XLV) 32.47 22.95 -29.3%
Johnson & Johnson (JNJ) 70.00 50.00 -28.5%

As the overall market was losing more than half its value (Ouch!), the Select Sector Healthcare ETF (XLV) and Johnson & Johnson (JNJ), while losing significantly, outperformed the overall market by over 20 percentage points in the debacle. Yes, a pile of net worth was erased, but the damage could have been much worse (and these figures don’t reflect the nice dividend that JNJ and XLV paid out during those years).

Brexit will come and go. The market may scale higher; it might plunge. But over the long run, betting against certain sectors or the United States as a whole, has been a losing proposition. We have survived two world wars, the Great Depression, Vietnam, Y2K, Greek debacles, Detroit bankruptcy, the financial crisis, and numerous presidents—some good, some not so good. We have survived crises after crises, and the market in the U.S. stands only a few percentage points off its all-time high. That might change for the worse after this Brexit vote, but if two centuries are any indication, it might be a great buying opportunity.

In fact, those wishing to buy stocks at a lower price in a disciplined fashion if the market drops, should consider put selling. See our blog/issue on put selling in the healthcare sector. You’ll collect some premiums along the way, and if your stock declines enough, it will be put into your account at a price lower than its current price.

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