Review & Outlook

Our take on the investing, financial, & economic themes of the day

Buying Opportunities from the Brexit Sell-Off

U.S. markets have been up strongly yesterday and (thus far) today, as have British and European markets.  Are there buying opportunities among the stocks that sold off sharply on Friday and Monday?

Fewer than you might think.  The selling on Friday and Monday wasn’t indiscriminate, and it’s indiscriminate selling that creates opportunities.  Not everyone understands this, including the headline editors at the WSJ.  Consider the curious subtitle from a WSJ piece the other day by Spencer Jakab titled “Are There Bargains Among the ‘Brexit’ Wreckage?”.  The subtitle read, “Not all stocks were equally hit when the U.K. voted to leave the European Union, but that doesn’t necessarily mean a buying opportunity.”  The implication is that an unequal stock sell-off would mean that there were buying opportunities.  This seems exactly backward: if stocks were equally hit when the U.K. voted to leave, then there would be obvious buying opportunities, because stocks’ fortunes aren’t equally implicated in Britain’s EU membership.

Here’s a snapshot of the hardest-hit large-cap London-listed stocks from Friday:

FTSE losers

As I noted yesterday, there was a clear predominance of financial services companies. A fair number of stocks in the FTSE 100 were up on Friday:

FTSE winners

The S&P 500 Index sold off, but as you can see from the dashed line below, it dropped back only to its level in March, which is a point where many companies were still near their 52 week highs.

s&p 500

As in the UK, financial stocks in the US sold off the most during Friday and Monday’s declines.  The sell off might be merited in big global banks, but it’s less clear why small-cap US banks or financial technology companies like S&P Global (SPGI) should be punished.  These are the sort of limited opportunities we’ve been considering.