The debate around the Brexit and Bremain scenarios has created volatility in the equity and foreign exchange markets, with the markets trying to handicap near-term odds along with the London bookies every day. While we have no edge in predicting the outcome of the vote, we do believe, however, our job is to identify non-obvious long-term insights. As investors focused on the big picture, we believe it is key to understand the root cause of these types of events and then exploit the volatility.
Rather than trying to handicap the near-term odds, we believe it is more interesting to ask the bigger picture question about Brexit and similar phenomena around the world: What do Brexit and similar movements in other countries tell us about the prevailing trends in society and people’s feelings about them?
To us, they are manifestations of fear around the pace of change and disruption taking place globally. Programming jobs are being disrupted by cloud computing and the globalization of workforces. Manufacturing or warehouse worker tasks are increasingly automated and roboticized. Smaller retailers are struggling to reinvent themselves in the face of ecommerce while financial services professionals need to adapt to digital distribution and fintech. If you are a fashion company your world has changed from publishing a glossy catalogue twice a year to “always on” digital media. As a result, they now need to meaningfully shorten design and manufacturing lead times to adapt to evolving customer needs.
Global mobility makes the world smaller and increases competition but it also creates new opportunities. All of these changes will eventually increase productivity and over the longer term will contribute to our collective well-being. However, near-term disruption can be scary. Regardless of the outcome of this vote, over the long term, the UK and the EU will not only remain interconnected but their connectivity will continue to grow.
Our strategy mandate is to profit from long-term growth trends and alpha generation rather than focus on trading short-term volatility. In managing our International Small-Mid Cap Strategy, we try to position the portfolio to weather the volatility and also potentially benefit from any dislocations in the market. Some believe that volatility and risk are one and the same, which has them concerned over the Brexit/Bremain scenarios. We believe that risk should be viewed as the probability of permanent loss rather than volatility. Over the long term, we believe that holdings within the strategy are not likely to be meaningfully impacted, given their structural growth orientation. But it is important to be mindful of risk and understand the short-term challenges of these scenarios.
In closing, there is a reactionary impulse to try to resist, stop or slow down the pace of change. History shows this to be futile. Our common challenge is to keep pace with these rapidly evolving trends. As investors, we know volatility can’t be avoided entirely and look to construct a portfolio that is well-diversified with the potential to be resilient in times like these. We stay focused on the long-term but know that the current environment gives us the opportunity to invest in some interesting opportunities that are temporarily discounted by the market.
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Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes, regulatory and geopolitical risks. Emerging and developing market investments may be especially volatile. Eurozone investments may be subject to volatility and liquidity issues. Investments in securities of growth companies may be volatile. Small and mid-sized company stock is typically more volatile than that of larger company stock. It may take a substantial period of time to realize a gain on an investment in a small-sized or mid-sized company, if any gain is realized at all. Investing significantly in a particular region, industry, sector or issuer may increase volatility and risk. Diversification does not guarantee profit or protect against loss.
These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.