The Brexit Boost

by | Jul 12, 2016 | Archives

Economic opportunity is created by supply and demand.  A growing global population, if put to work in increasingly efficient ways, increases everyone’s wealth.  This real growth is reflected in long term stock prices that fluctuate short term (based on greed and fear) as they rise.

Short term change, that does not affect supply and demand, but causes a global stock spike, up or down, creates distortions that can boost profits.  Brexit is such a change as it has created a lot of fear.

Brexit created  a distortion we can see in the price of the Vanguard International Equity Index Fund (symbol VT).  This ETF reflects global share prices as it tracks benchmark indices created from the price of 7,728 stocks in 46 developed and emerging markets around the world. The fund tracks the performance of the FTSE Global All Cap Index, a float-adjusted, market-capitalization-weighted index designed to measure the market performance of large, mid-and small-capitalization stocks of companies located around the world.

finance.yahoo.com chart

This chart from www.finance.yahoo.com shows how share prices dropped globally after the Brexit vote.

Brexit may cause a wrinkle, up or down, in the global market place, but nothing compared to the market’s reaction.

The basics of global wealth growth remain good.  For example, the latest Federal reserve report on American household wealth shows it climbed to new peaks bolstered by rising real-estate values that more than compensated for a flat stock market.  The net worth climbed by $695 billion to $85.7 trillion.  Global wealth increased as well.

Investing in this long term global economic growth enhances the odds of top investing performance.

ETFs and indexing are one of the most efficient ways to  capture this growth.

ETFs are one of the easiest but least expensive ways to invest in value.  Indexing strategies aim to equal a specific market index as closely as possible.

Benefits of ETFs over traditional mutual funds include:

Better performance.  Statistics show that more than 75% of all active money managers fail to beat a bellwether index in their sector over short and longer term periods.  Most actively-managed stock funds can’t beat the stock market nor can they beat investors who use indexing.

Reduced  tax.  Actively managed funds exert a heftier tax bill on portfolios than passive products.

Lower portfolio turnover cost.  Every time a manager makes a trade, there’s a cost.  ETFs invest in the shares that compose the index and do not trade.  In a typical year actively managed funds in the US turn over 85% of their holdings.  Remember that this activity resulted in poorer average results than the indices for 75% of these funds.

Anticipating short term price movements is like trying to predict wave tops on an incoming tide.  Indexing with ETFs lets you invest in distorted sectors in the least expensive way.

According to Keppler Asset Management, the United Kingdom MSCI Stock Market Index was already a good value market before Brexit.  The Price to Book at last valuation was 1.71, (World index 2.09) PE ratio 18 (World index 19.3) and dividend yield 4.35%, (World index 2.66). That yield is the highest of all good value developed markets.

These UK valuations are much better than the MSCI World Index.

keppler chart

Logically an index investment in the UK is better than an indexed investment in world markets at this time.

Combine Value and ETFs

Even better is an equally weighted investment in each of the good value developed markets.  Adding this well diversified, equally weighted good value investment during a global market dip increases safety and profit potential.

Here are the valuations of the good value developed markets.

keppler

Brexit is such a complicated issue.   The unintended and unexpected consequences, good and bad, will go on for years.

Indexing strategies, that focus on value, cut through all the complexity.  There are more people every year, more productivity, more supply and more demand.  Value indexing allows us to diversify into value for the long term and ignore all the time wasting and stress creating ups and downs.

This is how investing should be- a simple, easy, fast way to feel increasingly secure in a volatile world.

Gary

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