Portfolio Update – Q2 2016

Q2 performance: -7.15%

What a difference a week can make in investing. Just one week before the quarter end, my fledgling portfolio was ready to celebrate an inaugural gain of about 15.5% as Barclays surged on the expectation that the UK would Remain in the EU. On June 24th however, we woke up to the news that the UK had voted Leave, sending markets into a tailspin. My portfolio, which consists only of Barclays got flattened the next trading day, going from 186.75p down to as low as 121p, before recovering slightly to 153p. The next few days, the shares drifted downwards, eventually finishing Q2 at 140p.

Given the market carnage in financial stocks, I was naturally forced to reappraise the situation. As John Maynard Keynes once said, “When the facts change, I change my mind”. When investing, it’s extremely important to re-evaluate a company on significant news or results.

The fall-out from Brexit has been felt sharply in the UK, and to a lesser extent abroad. Sterling has plunged, especially against the Dollar, where it now trades at a low not since the 80’s. We have seen a flight from risk assets (European banks, in particular Deutsche Bank and Italian banks) to treasuries which in many countries are hitting all-time lows. The fact that both Chancellor George Osborne and Bank of England Governor Mark Carney have directly intervened to try and stabilise things is indicative of the concern felt. In the short-term, GDP will grow less than expected, lending will fall slightly, bad debts will go up slightly, investment banking income will continue to lag. The consolation is that the heavy work of transformation is mostly complete, so I still have hope that the improved operating results will more than balance out the short-term economic shock of Brexit.

In the long-term, I am more optimistic. The expected cut in interest rates and injection of liquidity by the Bank of England will provide a gentle tailwind. Indeed, I think Osborne’s measure to cut Corporation Tax will also help. It’s the Sterling devaluation however that could really put the wind in the sails of the British economy. We know from when George Soros pushed the UK out of the ERM in 1992, the UK took a short-term hit. In the long-term however, the British economy went on an 8 year tear. I am pessimistic we will see that same sort of growth, but I certainly wouldn’t be surprised if the economy surprises on the upside with Barclays benefiting. Indeed, as one old research note I read stated, Barclays is not a typical buy and hold stock, rather something you dip into during the 5-7 year periodic market panics as it always recovers. We are clearly in that environment now. I topped up my holding at the 132p mark late last week. Q2 results later this month are eagerly awaited.

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