11-Aug-23 Equities

Keep calm and carry on?

Lessons from the Brexit and other attempts at forecasting the perfect entry and exit points in stock markets

Higher profit margins for the FTSE 250 after the Brexit

Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 8/8/23

 

 

Our Chart of the Week illustrates this by comparing the more international FTSE 100 with the more British FTSE 250.[1] So, if one had acted entirely according to the initially posted thesis and taken the bad news of the upcoming Brexit as an opportunity to buy British stocks, one could have sold the shares by February 2020 with a significant profit. If we take a closer look at both indices, we can see that the more local FTSE 250 initially reacted more strongly to the Brexit. However, after both indices hit local lows on June 27, 2016, the FTSE 250 rebounded comparatively faster than the FTSE 100 with its more international focus. Our chart shows how well the FTSE 250 performed compared to local blue chips until the Covid pandemic hit global markets again in March 2020.[2] So far, “Buy on bad news, sell on good” seemed like quite a good strategy – provided you also had the foresight to get out just in time, before the next bit of surprisingly bad news.

To sum up, it appears easy to rationalize a strategy while looking at historical data, but it may be much harder to actually follow this strategy as the market continues to develop negatively. Or even if the news tends to be, or remains, negative, as was constantly the case with the Brexit between 2016 and 2020 if you asked many economists and market commentators.[3] After all, we know, not least from analyses of the past decades such as Amos Tversky and Daniel Kahneman’s Prospect Theory, how emotionally many people, not only as investors, act when fear is around.[4]

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1. The FTSE 100 includes the 100 largest companies listed in London, primarily international heavyweights. The FTSE 250, on the other hand, includes the 101-350 largest companies on the London Stock Exchange. Companies that operate internationally are mostly larger and consequently have a larger market capitalization.

2. The coronavirus outbreak affected markets in many ways and no longer allows for a separate consideration of the impact of Brexit on markets

3. See e.g. Britain after Brexit will not be alone, but it will be lonelier | Financial Times

4. According to Prospect Theory, many people behave irrationally when uncertainty is present and, for example, weigh losses higher than gains (loss aversion). See Kahneman, D. (2011), Thinking, Fast and Slow, Farrar, Straus and Giroux, esp. chapter 26 and Appendix B, and for a general, recent overview, Humra, Y. (2016): Behavioral Finance: An Introduction to the Principles Governing Investor Behavior in Stock Markets.

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