Drew P. Wilson, CFA
Investment Research Analyst
On June 23, 2016, in a referendum regarding the country’s membership in the European Union (EU), the United Kingdom (UK) electorate voted to withdraw. The precise process and timing for the UK’s withdrawal is unclear, but it’s expected to take up to two years. Make no mistake, this is a significant geopolitical event and it will affect the global economy to some degree. But, because it is unprecedented and — until recently — was deemed farfetched, experts of all persuasions lack conviction about what’s going to happen in the near- to medium-term. We have no special insights here. What we have been doing, though, is reviewing each holding to ensure we understand any embedded risks and looking for new opportunities in the wake of Brexit.
The immediate reaction in U.S. equity markets was pretty “efficient” in that companies with direct exposure to the UK and Eurozone were hit hardest followed by those with indirect exposure. Businesses with little or no exposure were affected the least. This is in contrast to some geopolitical events of recent years that caused more indiscriminant selling and wholesale “risk-on/risk-off” moves. Sales growth for companies selling into the UK and EU will likely slow and the impact of the stronger dollar will further weigh on revenues. Long term, however, we don’t think Brexit and its secondary effects will diminish the values of the businesses in which we are invested.
Tactically, Fenimore is examining potential first- and second-order effects in looking at risks and opportunities for the long term. For example:
- First-Order Effects: The potential impact on holdings with direct exposure to the UK and Europe.
- Second-Order Effects: The potential for a prolonged low U.S. interest rate environment and the influence on Financials and their growth rates. Or, opportunities for businesses to take advantage of weakened foreign currencies to acquire assets.
Around Fenimore, we have received few if any panicked calls. Despite some frightening headlines, our investors are once again proving a patient temperament and long-term perspective, both of which are crucial to preserving and building real wealth. They understand that there will always be uncertainty in the global investment landscape. The key is to have an investment plan, remain calm, and not get tempted to engage in performance-diminishing behaviors.
Is this a material event? Yes. Is it cause for panic? No. Will the stock market be volatile over the short term with stock prices dropping despite a company’s intrinsic value? Probably. Will more buying opportunities present themselves? Hopefully.