With the actual Brexit date now having come and gone, I am reminded of what we wrote in our Q1 review in April 2017:
“Theresa May has invoked Article 50 which whilst adding some certainty now means we will have another two years debating whether it will be a hard or soft Brexit. Certainly our European colleagues do not seem too willing to reward our EU departure with a friendly deal…"
Two years on it is hard to see what progress there has been bar May’s last-minute decision to initiate cross-party talks. Having been totally unable to convince her own party or cabinet, unsurprisingly these talks fell at the first hurdle, shock horror. Bookmakers had long priced the prospect of a Brexit delay as odds-on (i.e. highly likely) and with another extension being negotiated as we type the chances of a swift resolution seem as distant as ever. Speaking of hurdles, the weekend’s sporting events have generally provided much more enjoyable viewing, but the sad demise of Up for Review at the first hurdle in the Grand National does make one wonder how long the world’s greatest steeplechase will continue to be run. Little Tiger Roll’s achievements are astounding and whilst the bookmakers will have suffered with such a short priced favourite winning, they again got it right and at least wrote this risk at meagre odds.
The bookmakers’ plight bears some similarities with investing in financial markets, whilst it is impossible to win with every investment, as long as one wins more often than not whilst the overall market grows, returns can be very satisfactory.
Bookmakers have no control over a race but they can do their homework on the likeliest probability. And as long as the odds are in their favour (which they inevitably are) in the long run they win more than they lose.
Assessing political events and outcomes is much the same and our time is better spent doing what we can to improve the chances of investment success. Fortunately in the long run the odds are in investors favour with the world growing more populous and wealthy every day, providing the opportunity for long term compound growth in financial markets. For example, we cannot control whether GlaxoSmithKline will have a successful phase III trial but we can determine the price we’ll pay to buy the shares. Buying at a substantially lower price lessens the risk of an adverse event as there is less value attributed to this in the equity valuation. We were fortunate to be able to buy Glaxo recently at a 22% discount to today’s price despite the investment case being largely the same as it is today. The markets principal concerns being that Glaxo would overpay to rebuild an oncology pipeline (it hasn’t) and that Glaxo might cut the dividend (it hasn’t). The more their shares rise, arguably the more risky they become. Glaxo is of course a USD earner, so if we ever manage to cobble together a Brexit deal or have a soft Brexit then there is the chance that sterling could rally meaningfully to the benefit of the more domestically orientated plays. Brexit risk aversion has meant there are many UK domestics whom we believe trade below the sum of their parts. If we are correct, their odds could be well in investors favour.
Have a great week!
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