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The 1 Investing Lesson From Brexit

By now you should have heard of Brexit. Last Thursday, the people of the United Kingdom had surprisingly voted to leave the European Union.

It’s an understatement to say that stock markets around the world were spooked when the news first filtered through. In the two days following the Brexit vote, stocks around the world collectively shed S$4.1 trillion in value.

Stocks in Singapore had a part to play in that erosion of wealth. Last Friday, the Straits Times Index (SGX: ^STI) had lost 2.1%. The index’s fall meant that many blue chip stocks had declined in the day following the UK’s vote.

Two such stocks are Singapore Telecommunications Limited (SGX: Z74) and DBS Group Holdings Ltd (SGX: D05). Their share prices had slipped by 1.3% and 2.7%, respectively, last Friday. Their declines actually encapsulate an important investing lesson: During market panics, the baby can get thrown out with the bathwater.

How so? Let’s consider the businesses of the two companies.

Singtel provides telecommunications services in over 25 countries in the Asia Pacific region – it has virtually no exposure whatsoever to Europe. Will the people in Asia stop using their telecommunication devices because of Brexit?

Meanwhile, DBS is a bank and its profit depends partly on the spread between the interest it charges its borrowers and the interest it pays its lenders. The spread, which is known as the net interest margin, is in turn influenced by the prevailing interest rate environment. When rates are high (which they are not, now) banks can earn a fatter spread.

Brexit may have the ability to cause interest rates to stay low for a long time. Indeed, Federal Reserve Chair Janet Yellen said earlier this month before the UK vote on EU membership had occurred that it was an important driver in the Fed’s decision to leave interest rates unchanged. The Fed is the US’s central bank and interest rates in Singapore are influenced by what’s going on in the US.

A Fool’s take

Interestingly, stocks in Singapore seem to have recovered from any Brexit fears – for now at least. At the time of writing, the Straits Times Index is sitting above 2,830 points, higher than where it was last Thursday.

The events since Brexit remind me of a quote that’s supposedly attributed to the legendary investor, Benjamin Graham:

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

As we’ve seen above, the stock market had cast similar votes for both Singtel and DBS last Friday even though their businesses have vastly different exposure to what’s going on in Europe.

A good way to hunt for bargains would be to keep an eye out for the babies when the market clears out the bathwater every now and then.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Ong Kai Kiat owns shares in DBS Group Holdings.