Swimming against the tide might pay real dividends, says Motley Fool

Housebuilder Taylor Wimpey, in common with similar companies, has seen its share price fall around 20 per cent since the EU referendum. Picture: Rui Vieira/PA Wire

Sure, we’ve been rocked by other storms since those dark days. But they were centred overseas – Greece, the US, Russia, China – and were short-lived.

In contrast, the EU referendum at the end of June has had a clear impact on our portfolios. And like some mutant turnip that beats all-comers at a monster veg competition, this one was home-grown.

You might be thinking: “Crisis? What crisis?” The FTSE 100 is up in 2016. Many of us are having a great year.

However, as most will know by now, the UK market is largely up on account of the weak pound since the referendum – allied with the huge proportion of sales our largest companies generate overseas.

Those foreign earnings are worth more when converted back into shrunken pounds, delivering a one-off boost to the corporate bottom line. Without it, our portfolios would be suffering.

You get a flavour of the pain the indices have sidestepped by looking at the share prices of UK-focused large cap companies.

UK banks like Lloyds Banking Group and homebuilders such as Taylor Wimpey are down 20 per cent or more since Brexit day.

The market seemingly fears UK earnings will suffer in the months and years ahead, even as it’s grown giddy about the prospect of all those lovely euros and dollars to come from elsewhere.

In other words, it’s been sorting out the winners from those that would be hurt by a Brexit-inspired slowdown.

It’s reassuring to see the market behaving rationally. But is it right?

A clue investors may be over-complacent about this consensus trade of “sell UK exposure, buy foreign earnings” came earlier this month, when the High Court ruled the Government could not trigger Article 50 without the say-so of Parliament.

Fear not! You couldn’t pay me to wade through the politics here. I’m simply thinking about how the market is positioned.

You see, within minutes of the High Court ruling Parliament did need to be involved, the markets were moving. The pound rallied against the dollar, and some of those UK-orientated companies saw their shares leap three-four per cent.

True, the big moves subsided, and the pound gave up some ground. But the rapidity of the shift – on what seems like little substantial political change – may indicate we’re in a so-called crowded trade.

If most investors are already positioned for a weak UK economy and a weak pound (even shorting the companies they think most vulnerable), we might conclude there will be limited gains ahead should the expected reality come to pass.

Instead, perhaps there will be more upside for those who bet against the consensus and look for UK-focused firms to outperform.

Now, we’re long-term investors at the Motley Fool. I’m not suggesting you invest based on how you think prices will respond to the lunchtime news.

I’m simply going back to Warren Buffett’s maxim: “Be greedy when others are fearful, and fearful when others are greedy.”

If most are fearful of a UK slowdown and most are greedy for overseas earnings, then Buffett’s maxim suggests we should look for investments close to home.

Will things be so bad for the UK as to justify the share price falls we’ve seen for certain firms since June 23?

And will the pound stay down indefinitely?

I don’t know. Nobody does.

But I suspect a lot of negative thinking is already in the price.

Of course, we haven’t left the EU yet, and nobody knows what the future holds. But so far things have not been as bad as was predicted.

Like most people I thought the economy would be shocked by the vote. Uncertainty is usually a negative. Yet our economy has kept chugging along, clocking up GDP growth of 0.5 per cent in the most recent quarter. And looking into next year, the Bank of England just raised its growth forecast. It also decided not to cut interest rates.

So far reports of the death of the UK economy seem to have been exaggerated. But what about the truly long term?

The confounding of short-term expectations gives us fair warning about the hubris of predicting where growth will be in five to ten years.

We have no idea what the trading arrangements of the UK with the rest of the world will be, no idea if migration will still be boosting the economy, and no idea if the financial services sector will be tackling a hard Brexit.

But for what it’s worth, Deloitte chief economist Ian Stewart recently revisited the best guesses that leading forecasters made before the vote.

Their assumptions and conclusions vary. But, says Stewart: “If we stick with the average assumption, and assume UK trend growth drops from 2.3 per cent to 2.1 per cent, by 2030 the UK economy would be about 3.0 per cent smaller – and incomes 3.0 per cent lower – than had we stayed in the EU.

That is a material, but not a catastrophic loss.

Even at 2.1 per cent UK growth would be towards the top of the growth league for big industrialised nations.”

These are guesstimates, sure. But it’s worth asking if the shares of UK-focused firms have fallen out of proportion to the size and certainty of those predictions?

Given the absence of a post-vote slowdown, I’d say it’s possible.

This is a British storm, but the playbook that worked for the others of recent years – to assume markets and economies will muddle through – might work here, too.

Better yet, if you buy when others expect the worst, you could just muddle through to some healthy profits.