Essentially, with or without Brexit the investment risk in Europe is high, due to factors such as the price of crude, ECB monetary policy, the Chinese economic slowdown, the upcoming U.S. elections, etc. The amount of risk that I, as a value investor, am being asked to take for a low yielding potential payoff is elevated. I am still long Europe, but over the past months, I have been rebalancing (trimming positions during rallies) in order to maintain a stable level of portfolio risk.
It goes without saying that the UK is in a very politically fluid state. Within the world of possible outcomes regarding the EU, there is a probable scenario where Britain stays solidly inside of the union. David Cameron’s replacement as Prime Minister, soon after taking the reigns, calls an early general election ostensibly to ratify the referendum. The scenario is strengthened if the new Prime Minister is Pro-EU (probable). That election could overturn the results of the non-binding Brexit referendum and put him or her in a stronger position to renegotiate within the EU.
The most recent precedent is Greece. Its Prime Minister, Alexis Tsipras, called for and held a referendum in July 2015. The results overwhelmingly rejected the EU bailout packages. By September a general election overturned the referendum and gave Tsipras a stronger mandate to renegotiate within the EU. It’s a game of high-risk political chess.
Without Brexit most of the investment risk stemming from European politics is dissipated. However, the investing climate for value investors still remains highly risky due to a myriad of other factors, many of which are external. With a ratified Brexit referendum, either through a general election or a vote in Parliament, the risks remain where they have been for some time. High.
The bottom line for investors is that politics will probably be the main source of European market volatility and risk over the months to come. The political risks will slowly dissipate in Europe’s favor as ultimately, there is a strong political will among the largest economies for the idea of a “union” which goes beyond economics. However, for me to further invest in Europe many of the downside risks need to have a defined pathway to a positive outcome.
It Pays to Become a MyAssetClass Contributor
MyAssetClass pays you as much as $500 to contribute articles on your best and current experiences with value investing. The MyAssetClass.com forum focuses on the broad principles of value investing and publishes compelling and engaging content which will affect your decisions.
While investment strategies are personal, and this investor discussion forum doesn’t give investment or financial advice, there are some common tenets of value investing that can be better understood by structured and focused discussions with other like-minded investors.