Why I’m Bullish With Brexit

Last Updated on November 13, 2019 by Zion Miller

Background

Investors have recently been faced with many headwinds in the first half of 2019. With potential threats to Bulls positions constantly surfacing, 2019 has been volatile to say the least. The most recent event investors need to pay attention to is within Brexit and the threats/opportunities that are becoming increasingly apparent. In this article I will discuss;

• Brexit and it’s implications for the market
• How you can position to mitigate exposure and maximize gains
• Potential opportunities created by Brexit

What Is The Impact?

Brexit has Britain considering leaving the European Union, opening the door to a massive influx in regulatory hurdles for firms. The impact of this action (if taken) is likely going to incite violent moves in financial markets. Britain leaving the EU will present countless businesses with additional regulatory hurdles and in some cases may wipe them out. This can be related to the state of California breaking off from the US. How would trade continue? Surely additional constraints will immediately commence upon a decision to leave. One of the opportunities businesses have taken advantage of in being part of the EU is “Passporting.” Passporting allows companies licensed in one EU member country to trade across borders with ease due to less regulatory requirements. The loss of this opportunity and other factors have led many analysts to place a $5 billion loss in investment within Britain over the next 5 years if the vote is successful. This concern has led to UK Banks stockpiling in anticipation of their clientele wishing to withdraw funds due to rising fears. Although these concerns are primarily placed with the EU and Britain, the impact has already reached US markets. Last week US markets observed what some argue to be a 5-day lull as reported by MarketWatch, as investors weigh out the various outcomes. In an article released by the Guardian, it is estimated that the S&P 500 would tank 5% with banking stocks taking an 8% hit. This leaves a 40% increase in volatility for the overall stock market. Although these are just forecasts, they provide investors with potential insights into the impact. With that in mind, these projections may leave additional downside that isn’t fully scaled into the calculations. The only thing that’s for certain with this decision is that investors need to protect portfolios from risk with the decision.

How Do I protect My Portfolio?

Let’s say Brexit goes through, how are you positioned? Shares of LABD (Direction Daily S&P Biotech Bear 3X Shares) saw a 5% increase in value yesterday as investors cash in on a potential pullback. LABD stands to benefit from a Bearish outlook on the markets, specifically biotech as recently inflated prices begin to be tested and pull back. LABD in essence, is a Bearish Biotech ETF and is poised for growth as fears loom and unfold. LABD provides exposure to investors through a portfolio of “swaps” which is then balanced at the end of each trading day. For those of you unaware, a swap is a derivative contract in which two parties exchange either cash flows or liabilities from two varying financial instruments. Due to the nature of this fund with swaps returns are “path dependent,” meaning this is best played as a short term investment. A brief glance at LABD’s performance in a short term lens reveals current price suggesting that it has significantly reduced in risk. With Brexit looming, LABD is poised to gain in value on a lack of optimism in current price levels for a potentially inflated Biotech sector. Investors stand to gain by hedging risk. For the technical outlook on LABD please click here.

Coming off of highs around $60 in December, investors confidence has seemed to increase in a short term view with both a recent run from the markets and potential bearish events. Investors are also happy to find a potential rejection of price levels in the $16 range, suggesting a short term run to $18-21. Once in this range, it will be wise to assess sentiment on the outcome of Brexit & other factors impacting the markets for a healthy exit. This places LABD with a short term speculative price target of $18-21 for a potential exit. This reassessment is key to maximizing return due to the nature of returns swaps.

Potential Risks

If Brexit goes in a favorable vote by the market’s interpretation, we can likely anticipate a bit of “short squeeze.” Many people are bullish on some of Britains fundamentals in the past years such as their GDP growth rate coming in at 1.8% for the year in 2017. Britain has remained competitive in the global economy and showed many signs of growth, but Brexit is sure to negatively skew some of these measures. If this event doesn’t take the catastrophic route many are preparing for, we may see a bullish push as faith is restored in prices. Last week provided investors with a unique lens into the US markets take on Brexit as it remained rather stagnant in anticipation of a decision. Should the news be perceived as bullish (remaining in the EU), prices will likely find a healthy rally to combat the negative sentiment running up to the event. Should this vote go in favor of remaining in the EU, shares of LABD and other forms of hedging against this will likely result in a loss. With this in mind, the LABD should be played prior and not held through the vote to mitigate exposure. Additionally returns realized in a shorter term within the LABD are more optimal due to the nature of its composition (swaps). The opportunity presented by this risk is within playing the run-up to the decision. As opposed to the FDA decisions we commonly play in the biotech sector, the opportunity is within cashing in on investors lack confidence in Brexit being a bullish event. Holding through decision, just as in FDA events, presents a great deal of risk and is best to avoid when possible.

Conclusion

Brexit presents many risks to financial markets, but in turn presents a great deal of opportunity to investors prepared to position accordingly. A vote to leave the EU will impact countless industries who rely on the ease of commerce presented by EU membership. The impact will be felt further than directly impacted industries as investors witnessed in the previous “flat” trading week, which saw investors of both sides waiting for a clearer direction. Analysts have forecasted sizable downside from a vote to leave the EU, such as a potential -5% drop to the S&P 500 and downside & volatility for other related fields. This potential downside presents opportunity to investors through LABD, a biotech ETF taking a bearish perspective. Shares closed today (4/9/19) up 5%, but suggest further upside as fears persist. Although many factors indicate upside being imminent, there is a great deal of risk involved in holding through the upcoming vote. For a further technical view on the bullish thesis for LABD click here.