Brexit was not expected – most people assumed that the British will vote to stay in the EU and hence when the results came out yesterday, there was shock and surprise. The dollar strengthened, the pound weakened and stock markets as usual over reacted and fell globally and gold rose by about 4-5%. But these are all reactions from a market that is full of traders who try to predict what will happen in short term and try to make money on a daily basis. In the long run, I believe that not much will change. Brexit does not mean that UK will stop being part of the global trade and that the British will close down their country and will become an Albania. Life will go on in the UK and over time they will untangle the mess and will live happily ever after.
Having said that, one still needs to look at reasons for Brexit and see how it will impact us in the long run.
Globally the gap between the rich and poor has increased in the last 50 years and with the tremendous improvements in information flow to the poor through TV, Internet and mobile, this rich/poor gap is more easily visible to the poor now. The aspirations of the poor have increased and it is this class that is in the forefront of many of such events in the past decade.
The revolutions in Middle east took everyone by surprise. So was the margin of victory of Modi in India. Now we have this Brexit. In Nov, Donald Trump is likely to spring a surprise (just like Brexit, no one expects him to win but he is riding a popular mass support).
I think the coming decade will see a lot more such events globally. Countries will turn inwards and will be focussed on what is best for them. As global GDP growth slows down due to ageing population, competitive devaluation of currencies by major countries (or trade protective policies by countries) – interest rates will stay low globally and money will flood the markets to counter the stock market instability. Stock markets may go up due to this (especially in US and India)- but that will be due to increased liquidity and not due to great performance by companies. Commodities will go up due to this excess liquidity and volatility and Gold would be a safe haven asset.
So if you are invested in Stocks – just be mentally ready for a rough ride in the short run. There could be opportunities if markets go down. If you are good in momentum investing – then you can make money by spotting opportunities. For example right now monsoons are already there – and M&M (largest tractor player whose sale can go up due to monsoon) could be good momentum play with a timeline of 6 months. But it will be a volatile ride out there.
Gold - I believe will give 15% per annum in India. This 15% comes from 7-8% due to devaluation of INR vis a vis the USD per annum and another 7-8% from the global price increases in Gold (for more details on predicting the future gold price – please read my book).
Investing in Real estate in India right now is also fraught with danger - stay away from new launches as most builders are running short of liquidity and may delay delivering their projects. Investing in Urban land is still safe and if the price is right, innvesting in urban land will also give you decent returns.
I am right now invested in Gold (through ETF’s) and real estate. I am completely out of stocks (except for my ELSS MF’s that I hold for tax reasons).