FYI | Jun 23 2016
By Peter Switzer, Switzer Super Report
This damn Brexit vote could end up smashing bank share prices or sending them spiking higher and that's the big bet that you might have to make this week. Of course, if you are not a high frequency sell and buy type, then you are at the mercy of the Poms, who I hope aren’t all pumped up over their own self-importance after that brave win over the Wallabies on Saturday night.
I’m usually a sore loser — being competitive can do that to you — but even with two crazy penalty decisions from the ref, the Poms still tackled brilliantly and deserved their win. I can’t believe I’m saying that but I guess I can take comfort that they couldn’t have done that without an Aussie coach in Eddie Jones.
But back to Brexit and some polls are now saying it’s a line ball vote but 13% are undecided. However, a YouGov survey this week showed 46% now support leaving the EU while 39% support staying.
Charlie Aitken’s summary last week was enlightening and so was Richard Coppleson’s from Bell Potter who summed it up as:
-The UK stock market smashed
-Interest rates there cut to fight potential recession
-Gold and safe haven currencies spike
-The pound depreciates 15-20%.
But wait there’s more I’d throw in:
-Global stock markets would slump including ours.
-And banks would cop it.
You might ask why, well let AMP Capital’s Shane Oliver enlighten you. My old TV sparring mate says that the real concern globally was that a Brexit could reignite concerns about the credit worthiness of debt issued by peripheral countries.
This would likely lead to a flight to safety out of the Euro into the US dollar, which could in turn put renewed pressure on emerging market currencies, the Renminbi and commodity prices.
"And then we are back in the turmoil we saw earlier this year," Dr Oliver said.
But credit worthy concerns about governments then lead to question marks over banks and that’s where our stock market could get an extra clobbering, with the financials responsible for about 40% of the index.
Citi's chief economist Paul Brennan says Brexit getting up would have a bank effect but since NAB got rid of Clydesdale Bank, we’re less exposed to the UK financial system.
"This resulted in an almost-halving of Australian-owned banks' UK exposures, which would mean that Australian-owned banks are now less exposed to the UK than they are to the US and Europe", he said.
However, if Brexit gets up I reckon banks will be clobbered for no good reason other than that uncertainty will raise question marks over the banks’ balance sheets and exposures, just as we saw when commodity prices fell and miners’ debts to banks were questioned.
And by the way Coppleson says commodity prices could be negatively affected by Brexit and so it implies bank share prices will be as well.
Brexit is serious with Nigel Bolton, the co-head of Blackrock’s equity fund operations in New York telling CNBC he’s positioned his portfolio to low risk assets ahead of the vote. European shares as measured by the Euro Stoxx 50 has shed 7% in five days but if Brexit gets up this might only be a walk in the park compared to how markets respond to the uncertainty.
So, how am I playing Brexit?
I liked how on Friday when Brexit fears actually subsided that bank stocks went up and this shows the relationship. I can’t gamble on what the Poms will do, so I have cash in case Brexit happens and if it does I will wait for the early hysteria to subside and then I will be a bank-buyer.
If Brexit fails I will jump in early to ride a spike in the market but I will miss the first push up.
Of course a fair bit of pre-Brexit bank-selling has already happened. CBA in December was around $85 but by February it was down to $70, helped along by capital raising and home price collapse talk. It then went to around $78 in both March and May until the recent fall from grace to $72.03 on Friday.
I think bad Brexit news will take CBA into the high $60-mark and it has seen $69.79 over the past year but it didn’t have Brexit concerns hurting it.
If Brexit loses out to Bremain, I’d think CBA heading towards $78 is not too far fetched. I think there is a bank buying opportunity either with a Brexit or without it but the timing of the buying will be very different. Do it fast if Brexit fails but if it gets up then it might be slowly, slowly catch a monkey and buy when everyone seems to be the most scared.
That takes guts but it generally works.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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