Since my last post, the Brexit vote has come and gone and despite high levels of volatility, financial Armageddon seems to have been avoided – for now at least. As I write, the FTSE 100 is comfortably over 6500 and above pre-Brexit levels. So what was all the fuss about?
The headline FTSE 100 figure does not tell the whole story. Within the 100 index itself, the structure has changed with house builders, banks and recruiters declining significantly and many more defensive or globally oriented stocks rising. A look into the wider indices such as the FTSE 250 and FTSE All Share and it becomes clear that some stocks are being priced for poorer trading conditions and a possible recession, while other stocks are fairing better, even showing healthy gains over the past week, despite the uncertainty that exists on many fronts.
We have two months before the Conservative party appoint a new leader and therefore, our new Prime Minister. When (or even if) that person will trigger Article 50 to begin our exit from the EU remains unclear and I imagine it is possible that a mid-term General Election could be called to give our new PM the mandate to govern, especially while the Labour party is in open revolt against its own leader. And who know when or if Nicola Sturgeon will push for a second Scottish Independence referendum. Beyond these shores there is also much uncertainty. Just this week there was a risk of a run on the Italian banks which seems to have been averted with a E150 billion bailout and going into July 4th weekend, it seems that Donald Trump has taken the lead in the polls in the US Presidential race. What a mess!
Anyone who thinks that the Brexit vote is the end of the uncertainty is, I’m afraid, deluding themselves. I believe there are turbulent times ahead. In fact, there was an excellent post and discussion on Stockopedia this week by a poster called “dscollard” sugessting that the current relief rally could merely be the preamble to a much larger stock market sell-off. I tend to agree, although when/if that might happen and what will be the trigger, remains to be seen. Given this, I will be restructuring my own portfolios to be more resilient and hopefully profitable in these unusual and turbulent times. Simply having a portfolio of good growth and income stocks is unlikely to be sufficient.
Readers will recall that I went into the Brexit vote with around 58% of my portfolio in cash. Since Brexit, I have taken a position in Anglo Asian Mining (AAZ.L) to provide some exposure to gold in what I believe is also an interesting recovery/growth story. Over the next six months, it is my intention to drip feed my remaining funds back into the market – I don’t feel an urgent need to rush back into the market but equally, I don’t want to be out of the market for too long when there are potentially some great opportunities. Next week, I will post a quarterly portfolio update along with details of my portfolio restructuring. Conceptually, I have outlined below what my strategy will be over the next six months or so:
I have maintained my holdings in 3 out of 4 Special Situations (IOF, GVC and SRT) and I remain comfortable with those holdings. However, I intend to focus on fewer growth shares with the emphasis firmly on Quality rather than Value or Momentum. By drip feeding money into those holdings, I should end up with decent average buying prices once the dust settles. I am also mindful of which industries I want to avoid (i.e. those that will be hardest hit if we head towards recession) and I am looking for companies that have either global reach and/or earnings in dollars.
As far as my income portfolio is concerned, I am going to sit on the sidelines for now and keep plenty of powder dry to buy when/if there is blood on the streets. Shares that currently yield 5-6% (and there are plenty of these right now) could potentially be bought for yields of 7-8% if there is a dramatic market sell-off. I’ll forgo some short-term income in order to buy a higher overall yield for the longer term.
In some respects, my purchase of AAZ is something of a hedge but I am also looking at a gold ETF as a more pure hedge on market and currency fluctuations. Aside from this, I will be looking for an opportunity to short the FTSE indices, both as a portfolio hedge and as a trading play. In normal market conditions, I tend not to hedge my portfolio, preferring instead to trust my stock picking research, analysis and instincts but with the level of volatility I think we will see in the months ahead, a hedge that is opened at a relative peak seems like it might be a smart move.
We are potentially living through events right now that will change the world forever. I can see nothing but extreme volatility and uncertainty in the immediate future and my aim is to profit where I can (I have a full-time job, so trading short-term moves is not an option) and moreover, put myself in a better position coming out of this period than before the chaos.
Most importantly, I want to be able to sleep well at night and enjoy life!
Disclosure – I am long AAZ, IOF, GVC and SRT