Has the Referendum Created Value?

Britain’s voting to leave the EU (I cant bring myself to use acronyms) got their wish last week and equity markets initially reacted badly; although it seems to be business as usual for risk assets since then,  after the Bank of England talked about more liquidity being introduced and the prospect of 0% interest rates was touted.

FTSE Range last week

Over these last 5 days the FTSE-100 has traded in a range of almost 9%, but whilst the recovery from the lows has been encouraging for supporters of equities it is important to remember that the index has fallen over 12% from its April 2015 and continues to trace out a pattern similar to 2000 and 2007 that ended with significant losses.

Mkt Tops

History doesn’t repeat itself but it often rhymes,” (Mark Twain) 

This means market conditions in my view remain skewed towards negative outcomes; one of the most reliable indicator of valuation remains Price to Sales and looking at an average of the collection of bellwether shares that I use as a proxy for the FTSE-100 the odds continue to suggest that the index will provide low or negative returns over the next five years.

PS & returns

This is also demonstrated by showing the predicted returns from the price to sales (this assumes growth in revenues will be at the long term average of 2.7%) assuming that the ratio reverts to either its mean or average level – as you can see reversion to the minimum is probably a more accurate indicator of future returns and they remain negative.

PS & returns implied

I never rely on a single indicator but this one continues to provide an accurate range of returns 

So at present it appears that the Referendum result caused only a temporary blip to equity markets and more of a chance for short term traders to exploit potential value; for longer term investors there remains limited opportunity and its important to remember how capital preservation works……..

  • Great news the FTSE-100 is up 13.3% from its lows in February!
  • It is great if you invested £1,000 in February you would now have £1,133
  • However what if you invested that £1,000 at the start of 2015?
  • From 2015 the FTSE-100 lost 15.08% so in February the value of your investment would be £859
  • The recovery of 13.3% would only provide a return of £114.27 no £133 and your investment would still be underwater at £973.25
  • The message is keep those drawdown’s to a minimum!

Looking at a real life example of my model portfolio all the indicators that I look at have consistently pointed me to a cautious stance and a need to be invested in what I consider the ultimate safe haven (Index Linked Gilts); this has served me well over the last year with almost 80% in an Index Linked Gilt Fund. (The referendum result pushed these higher and whilst unexpected gave a welcome boost – the reason for the rise may be a combination of falling sterling and possible rising import costs as much as a rush for safe havens!)

model retunrs


I mentioned last week that Easyjet was a share that I was monitoring but holding off making a decision until after the referendum (see Nothing New 23rd June 2016 ) and that turned out to be sensible as although its recovered over the last day of so the price is down 30% in less than a week.

Whilst earnings estimates will undoubtedly be downgraded and the risk of falling revenues exist its important to remember……

  • Low price ratios and attractive dividend yield
  • Interest covered 49x
  • Dividend covered 2.5x
  • Cash exceeds borrowing
  • Predictable business
  • Likely to continue to gain market share from larger airlines

There are no doubt potential negatives but with a relatively strong financial base then a contrarian purchase could be worth considering as a reversion back to the average PE could be pretty profitable here is a simple check: –

  • Current price £10.59
  • Current PE ratio 7.73x
  • Lowest current broker EPS forecast for 2016 £1.23 (most are currently upwards of £1.43)
  • Remember PE = Price / Earnings so Price = PE x Earnings
  • Price based on current PE and forward EPS = 7.73 x 1.23 = £9.50 a loss of 11%
  • Price based on 10 year average PE and forward EPS = 18.74 x 1.23 = £18.74 a gain of 77%
  • Price based on 3 year average PE and forward EPS = 12.31 x 1.23 = £15.14 a gain of 43%

This short hand approach provides an idea as to why this is worth considering – near term though dont be surprised by further declines as short interest in the share is now rising again (although a lot lower than earlier in the year).


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