Despite Brexit, Keep the Technology
When the British went to the polls last Thursday to decide whether they would remain in the European Union or not, the general opinion was that they would opt to remain. Many Britons were clearly unhappy with the regulations coming out of Brussels, the wave of immigrants arriving in the U.K. and just the state of things generally. But they also realize many benefits from E.U. membership, not the least of which is more favorable trade relationships, so most pundits thought the good of membership would outweigh the bad.
But in a 52%-48% vote, “Leave” carried the day and roiled markets around the world. It’s estimated that global financial markets lost at least $2 trillion in value on the Friday following the vote, the biggest drop since the financial crisis in 2008. And while it’s thought that economic impact of a Brexit will be minimal here in the U.S., our own markets weren’t immune to drop as the S&P 500 gave up 3.6% of its value and the Dow Jones Industrial Average lost just over 3%.
The tech sector was hardly spared the carnage as the Nasdaq dived 4.12%, with IBM (NYSE: IBM) down 5.5%, Alphabet (NSDQ: GOOG) losing 4.2% and Apple (NSDQ: AAPL) falling 2.8%. Given the hit that the technology and consumer-related sectors have taken in fallout from the Brexit vote, not to mention the surge in gold prices, the markets are clearly worried about the fact that no one really knows what happens now.
Personally, I don’t think the Brexit will spark a full-fledged financial crisis such as we saw in 2008. While the British pound has plunged against the dollar and British government bonds have soared as investors seek safe havens, central bankers around the world stand ready to intervene if things get too out of hand.
The European Central Bank is already running negative interest rates, and the British chancellor of the Exchequer and the Prime Minister of Japan have both said they have the will and the ways to intervene if need be. Britain’s central bank governor Mark Carney also said he could pump out about $340 billion to support any troubled U.K. lenders and smooth out the market. Our own Federal Reserve isn’t as likely to make an interest rate move this year, with the futures market now pricing in just an 11% chance of a hike by years-end.
Unfortunately, though, the logistics have yet to really be worked out. Current and soon-to-be-former Prime Minister David Cameron has given himself until October to resign, so most decisions will be put off until then. And while the next general election in the U.K. isn’t slated until 2020, many are arguing that snap elections will have to be held in order for the government to have any credible mandate to move forward. Since two-thirds of parliament members would have to vote to set an earlier date, who knows when or if that would happen.
Once the British do get their ducks in a row, it will still likely take at least two years for the U.K. to untangle itself from the E.U., a long enough time for still more unknowns to emerge. Despite all the uncertainties, the best thing for tech investors to do right now is stay the course. It would be wise to pay attention to how dependent a portfolio company of yours is on Europe or the U.K. for its revenue and earnings, as well as make sure they’re in line with your overall risk tolerance since the markets are going to be choppy for a while. But those are all things you should generally be paying attention to anyway.
Regardless of how the Brexit process unfolds, the major trends in the tech sector won’t change; data users will continue transitioning to the cloud, biotech companies will still be working to find cures for cancer on other diseases and artificial intelligence still needs to get smarter to deal with all the data that companies are aggregating. So from that perspective the Brexit vote may have created a good opportunity to find some bargains.