Could Brexit be the best thing to happen to the London Stock Market? The last time Britain refused a big idea from Europe, the exit from the Exchange Rate Mechanism back in 1992, the similarities are encouraging.
Exchange Rate Mechanism was a financial precursor to the euro, where attempts to pitch the pound against the deutschmark failed spectacularly and the date September 16th 1992 became known as Black Wednesday. The initial reaction back then was one of negativity, with many economists predicting it all to end in tears.
However, Black Wednesday soon proved to have a very definite silver lining as sentiment switched from fear to greed before settling in to one of the biggest bull runs. The FTSE 100 trended upwards for the remainder of the century. The low that it had plunged to on a hectic trading day of 2,221 went on to hit 6,930 on December 31st 1999.
There are significant differences between today and 1992. Back then interest rates were much higher than they are today, they were raised to 12% on Black Wednesday, but were cut in half within months as the Treasury steered the economy off the rocks of recession. Sceptics will argue the same thing could not happen again, but sterling’s double-digit devaluation against both the dollar and the euro since the start of year has already boosted the competitiveness of British exports making them cheaper for foreign buyers. Companies and investors receiving revenue overseas will have already found that the deflating sterling has improved the value of that income when converted. Although hopes of a quarter point proved premature last week, if Mark Carney does move from the current rate of 0.5% to 0.25% next month, then interest rates will have halved again.
So where does this leave the trading community. Well currently alternatives to equities are fairly ghastly. Cash deposits are pointless, bonds seem sure to lose you money and property is too dear and dangerously illiquid. So stocks and shares are the best for an income starved world.
Taking the FTSE 100 as an example, the average yield is 3.8% but many blue-chip companies pay more than that. Glaxo Smith Kline dividends equal 4.8% of current share price, Legal & General yields 6.4% and BHP Billiton 8%. Yields such as these pay investors to be patient as politics and media calm down and the economy to perk up. Others argue that there could be substantial gains made from takeovers and mergers as the shrinking pound will make British assets seem cheap to foreign bargain-hunters, an example of this, and a decent trading tip, American cinema chain AMC, paying nearly £1bn to buy Odeon and UCI networks.
Bad news can create good prices for the long term investors willing to seek opportunities in short-term setbacks, and although there is still a great deal of uncertainty about the economic and political outlook, there are still exceptional opportunities and a lot of markets will be looking on the bright side of Brexit.