No matter what your stance or vote was before June 23rd, there is no celebration going on after the UK referendum.
Brexit doesn’t qualify for me as a Black Swan event (others disagree), simply because it wasn’t unpredictable like the Swiss National Bank’s move in January 2015. Brexit was clearly underestimated and we are now entering into a period of some type of Chinese water torture, during which various events will unfold from the Domino effect. In Seeking Alpha, there are more insights on the topic.
Brexit will probably win top position in events that have multiple and long lasting domino effects. A dozen domino effects or more are foreseeable (i.e. highly probably) and then more that aren’t yet in our peripheral vision, as we live a very interconnected world. A world with intertwined economic and political relations and Big Data is a nascent discipline yet to display these soon and help us prepare.
We’ve been monitoring publicly traded companies through the Daily Fintech Index, and in the beginning of this year, we looked at some metrics to decipher whether the payment disruption story is reflected in their price behavior.
The pound (20+%), the British banks (20%-30%), and Spanish and Greek stock markets (10%+) took the hardest hit. The Chinese stock market and the US reacted the least, and of course, we are all relieved that the weekend gave a breather to everybody.
From Daily Fintech Index (see here listings ranked by market capitalization) there were 7 companies that dropped more than 10%
|Charles Schwab – SCHW||26.15||36||23.72||-11.92%|
|E*trade – ETFC||23.11||6||17.79||-11.76%|
|Nordea bank ADR – NRBAY||8.15||37||8.78||-10.68%|
8 companies that dropped more than 7%
|Ticker||Company name||Price (S)||MarketCap (bil)||PE||% PriceChange|
The bulk are depositary institutions and brokerages (especially in the hardest hit first group). In the second group, we see some large providers of banking technologies (SEIC. ACIW, FDC, SSNC) and few in the investment management business (AMTD, WETF). Yirendai, is only one in the consumer finance and marketplace lending (Lending Club and Ondeck suffered a more muted reaction).
Seeking value in the Daily Fintech Index post Brexit
A combination of an opportunistic and fundamental approach is recommended during these times. Start monitoring first. Create the Post –Brexit FIN portfolio to watch. Start with the 15 stocks above, add Lending Club and Square (pure fintechs that didnt drop as much and would be worth investing especially if the slide continues), add the four battered British banks HSBC, Loyds, Barclays, RBS and then go through the list of Global systematically important banks (G-SIB) to look for value.
Use TipRanks, that ranks analysts (from corporate analysts to financial bloggers) and stocks and offers a variety of tools for guidance of fundamentals on a portfolio. Check out your potyfolio with the visual snowflakes of Simply Wall St that offer fundamental and sentiment analytics in visuals.
If you believe that equity of Finservs can’t offer value, simply because regulatory fencing doesn’t allow for any risk taking, therefore no juice – expected return; then now is the time to find the financial services firms that are sound and buy debt (as close as possible to the equity part of the capital structure). Any Fintechs out there giving access to retail to research and to trade secondary market debt (smaller denominations and reasonable bid-ask spreads)?
Start by montioring CDS levels that are an important gauge of financial stress. Friday bank CDS spreads traded anywhere from 20% to 34% down for the major banks; but nowhere close to the high levels (see details here).
As Fred Wilson said in “Some Thoughts after Brexit” remember that change creates opportunity if approached correctly.
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