Stocktake: Brexit continues to wrong-foot investors

"No one knows how to price the Brexit scenario going forward", Citigroup said last week. That's a euphemistic way of saying no one has a clue what is going to happen.

Few events have wrong-footed investors like Brexit. Bookies and investors thought a Brexit vote was a non-runner. Market carnage then ensued as stunned investors digested the news; Boris Johnson looked unstoppable in his bid to become PM; George Soros was warning that the dissolution of the EU itself was "practically irreversible".

Within days, Johnson was gone; Soros was saying the EU’s collapse “no longer looks like a ‘fait accompli’”, due to “positive momentum for a stronger and better Europe”; the FTSE 100 hit 10-month highs, buoyed by the possibility that Brexit might not happen after all as well as the promise of stimulus measures from the Bank of England.

What’s next? Only a fool would pretend to know the answer, although it would be wise to assume that the current uncertainty will not vanish any time soon. The performance of UK stocks is much less impressive if you adjust for sterling’s collapse, while the elevated price of gold and sub-zero government bond yields testify to continued investor jitters. With the political and financial environment as fluid as it is, it’s likely that market moves will continue to wrong-foot investors in the coming weeks.

Tabloids change their market tone

Fear sells newspapers, which is why the British tabloids like nothing more than scaring the hell out of their readers during nervy markets.

June, 2015: “Greek debt crisis hits British pensions – savers warned of further TEN per cent losses” (Daily Express).

August: “Savers now run the risk of catastrophic and irreparable damage to their retirement” (Express); “A disaster for the vast majority of workers with pensions” (Daily Mail).

December: “How YOU could be forced to DELAY retirement because of the plummeting oil industry” (Express).

February: “OLDER people are fleeing to the safety of annuities as the stock market meltdown ravages their pensions” (Express).

A more responsible approach is currently being preached, however. “Keep calm and carry on paying into your pension”, says the Mail. “Pension savers told ‘DON’T PANIC’”, says the Express, urging retirement savers to “keep their cool and not make hasty decisions”.

Why the change of tone? Could it have anything to with the fact both papers urged their readers to vote for Brexit, the very event that has triggered the current turmoil?

Pension fund gets day trading

When volatility strikes, pension fund managers usually preach the virtues of a cautious, long-term approach. Slovenian fund manager Luka Konte has a different idea – he thinks it’s time to get day trading.

“Our strategy for next three months is to be very active”, he told the Modern Investor website, “which means day trading in equities.”

Konte’s fund, Sklad Obrtnikov in Podjetnikov (SOP), has over €200 million in assets and over 17,500 members, who hopefully have no problem with the idea of their retirement funds being used to day trade volatile markets. If it doesn’t work out, pension fund managers could always try subscribing to a few penny stock and spread-betting newsletters – apparently you can triple your money in a few weeks by following their tips.

The ripple effect of earnings optimism

One excessively optimistic earnings forecast from a solitary analyst can have more of an impact on analysts, investors and companies than one might think.

The arrival of an “extremely optimistic forecast” raises optimism among rival analysts, according to the authors of a new study, Standing Out from the Crowd: The Real Effects of Outliers. It also tends to result in a higher stock price and trading volumes on the day the forecast is issued. Additionally, firms with more extreme outlier forecasts are more likely to engage in earnings management in order to meet forecasts.

Importantly, these forecasts tend to come from inaccurate analysts affiliated with smaller, less prestigious brokers.

Why would market participants be influenced by sources with little credibility? Anchoring – the term used by behavioural finance experts to describe the human tendency to cling or anchor to a thought or number, even a completely irrelevant one – is one likely explanation, ensuring the ill-considered outlier “is not lost in the crowd, but ripples across the market”.

Technology strength augurs well for stocks

Strength in the US semiconductor sector indicates US indices may survive the Brexit scare and ultimately march higher over the next six months.

Just prior to the Brexit vote, the sector broke out of a multi-month trading range to a one-year high. There have been 11 such instances since 1995, according to Nautilus Research; not only do semiconductor stocks tend to continue advancing, so does the  S&P 500, rising on 10 occasions.

The average gain – 8 per cent – was nearly twice as high as that seen in a typical six-month period, notes Nautilus.