Worry more about bias than Brexit when it comes to investments
Anyone who follows sport knows there is no worse feeling than when your team has just lost. You get angry and your mindset immediately shifts into armchair-pundit mode. You have the uncanny ability to pinpoint exactly why your team has lost. The referee was awful. Your team's coach wasn't good enough. The other side cheated.
You don't entertain the thought that there is potentially no reason for the loss and that a random series of events came together without logic. This is a very human phenomenon called the narrative bias. Our nervous system requires us to search for patterns or meaning in everything - as a species we simply cannot handle randomness. There must be label on everything we do, an explanation and a meaning. Things don't just happen. Except, in reality, they do.
In the investment world, the narrative bias is omnipresent. When stock markets fall, we need to know why and, more importantly, why the current value of our pension or investment is lower as a result. Another narrative which equity managers love is the concept of global diversification. Every investor gets presented with a neat pie chart showing the investor that his fund or portfolio has stocks from different geographies. The investor sees the pie carved out into the various regions and feels good with the veiled understanding that this lowers the overall risk. The bad news is this chart is becoming increasingly irrelevant as globalisation and tech means that corporates can do business anywhere, regardless of where they are headquartered.
This brings us to Brexit - when presented with the pie chart over the last two years, we see there is a substantial slice of the pie invested in UK stocks and we immediately start to feel very uncomfortable. The Ftse 100 is the major stock index of the UK and lists the 100 largest listed companies in the country. Its link, however, to the UK economy is not as strong as you might think, with only 24.3pc of Ftse 100 companies' revenues derived in the UK. The London Stock Exchange and the UK is a just a place for global companies to list and often get headquartered. Diageo is a perfect example of a supposed 'UK stock'. Only 6.4pc of Diageo's global revenue is actually derived from the UK and the balance is mostly comprised of regions linked to the US dollar. The subsequent sterling devaluation as a result of the Brexit vote would prove to be a positive for the company and in the two weeks after the announcement that Britain had voted to leave the EU, the stock price had risen 17.3pc.
Diageo and similar international peers that are based in the UK will be categorised as UK stocks. Investors need to be comfortable with this slice of their pie and not be scared of it. In most cases, there isn't huge exposure to the UK itself. For firms like Diageo, Brexit is a minor bullet point in their overall strategy. For most of us who are invested in large global multinationals, it should also be a topical sideshow. Brexit will not push or pull global markets - global growth, trade and economic policy are the salient topics which will give equities short-term direction.
Outside of Ireland and the UK and even in continental Europe, Brexit is a footnote.
The money which ultimately moves equity markets is not concerned with what is essentially a local problem. So if you want to worry about something, be worried about how your own biases affect your investment decisions.
Will Sparks is associate director with Quilter Cheviot Investment Management (quiltercheviot.com/ie/ private-client)
Any investment commentary in this column is from the author directly and should not be seen as a recommendation from The Sunday Independent
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