BREXIT – ALL YOU NEED TO KNOW IN 5 MINS
The Full Report was Sent to our Premium Clients today morning. There is a lot of talk on Brexit and In the next 5 mins I will sum it up for you about how we at Stallion Asset see it.
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Stallion Asset’s View – We don’t really concern ourselves with global macro issues normally unless( we are long metals, export driven counters.)
We can’t rely on the macro to bail us out of a wrong decision on a business. Our Goals is easy, we buy businesses where opportunity size is large and we expect that business will grow 8-10x in next 5 years with sustainable growth of more than 30%+, High ROE, and at fair valuation. I am mediocre at predicting Macro-movements but that’s only going to help me make money not wealth. I am here to create wealth for my client’s not just money.
What is Brexit ?
It’s the issue of whether Britain should exit the European Union or not — a question that will be decided in a historic referendum on June 23. What is happening? A referendum to decide whether Britain should leave or remain in the European Union. Prime Minister David Cameron promised to hold one if he won the 2015 general election, in response to growing calls from his own Conservative MPs and the UK Independence Party (UKIP), who argued that Britain had not had a say since 1975, when it voted to stay in the EU in a referendum. For a start, those wanting Britain to leave the EU see it as an opportunity to reassert British national sovereignty and in a sense liberate Britain from the bottlenecks of EU both politically and financially.
What is the European Union?
The European Union – often known as the EU – is an economic and political partnership involving 28 European countries. It began after World War Two to foster economic co-operation, with the idea that countries which trade together are more likely to avoid going to war with each other. It has since grown to become a “single market” allowing goods and people to move around, basically as if the member states were one country. It has its own currency, the euro, which is used by 19 of the member countries, its own parliament and it now sets rules in a wide range of areas – including on the environment, transport, consumer rights and even things like mobile phone charges.
Why do they want the UK to leave?
They believe Britain is being held back by the EU, which they say imposes too many rules on business and charges billions of pounds a year in membership fees for little in return. They also want Britain to take back full control of its borders and reduce the number of people coming here to live and/or work. One of the main principles of EU membership is “free movement”, which means you don’t need to get a visa to go and live in another EU country. They also object to the idea of “ever closer union” and what they see as moves towards the creation of a “United States of Europe”. Advantages of Brexit Economically, Britain would immediately save $12 billion a year in EU budget payments. Freed from famously cumbersome EU regulations, Brexit supporters say, Britain would attract greater investment and become a more dynamic economic hub — particularly if it still had full access to the EU’s tariff-free single market. But that’s a big if, and would rely on Britain renegotiating a new trade deal with the EU’s remaining 27 member states — many of whom, post-Brexit, would want to make a bitter example of the U.K., to discourage other members from fleeing. Under the EU’s labour rules, any citizen of a member state has the right to live and work in another member state — a rule that has allowed some 942,000 Eastern Europeans to move to the U.K. as the EU has expanded its borders.
Brexiters say these migrants have overwhelmed the housing system and abused Britain’s generous in-work benefits. At least 34,000 of them are getting child benefits for children who do not even live in the U.K. and sending that money — totalling about $42 million a year — back to their home countries. Leaving the EU would allow Britain more control over how many migrants are allowed to enter. That’s become a big selling point after the influx of 1 million refugees into EU countries. Risks of a Brexit The uncertainty it would create could destabilize the markets and cause the pound to plummet. Some extreme predictions are that a Brexit will blow a £100 billion hole in Britain’s economy, and Britain will lose 3 million jobs! What will the referendum question be? “Should the United Kingdom remain a member of the European Union or leave the European Union? The two campaigns, “In ” and “Out”, are likely to form the official lobby groups for each side in the referendum have set out their positions on the main topics that will form the basis for the referendum.
How can I hedge my portfolio?
As I write this at 9.30am on 17-06-2016, the put options of 8100 Nifty June expiry is trading at 65.
We need to buy put options of Rs. 15,000 for every 10 Lakh Rupees Invested i.e. cost of hedging is 1.5%.
Assumption 1 – Portfolio of 10 Lakhs and beta of portfolio 1.3
Assumption 2 – Nifty goes to 7700 in worse case from 8180 currently i.e. BREXIT Happens.
If nifty goes to 7,700 (fall of 6%) on the 24th of June, the Value of the option goes to 430 (400 Intrinsic Value + 30 Time Value) i.e. value of the option increases from 15000 today to 99,200 (Profit of 99200-15000=84200). If Nifty falls 6% and your portfolio has a beta of 1.3, it will fall about 8%. Hence on every 10 Lakh Invested you will Lose 80,000 on the portfolio. By investing a maximum of 15,000 per 10 Lakh in 8100 nifty put option you can protect Downside risk for a month and still get unlimited upside.
What is the probability of Brexit?
According to Economist as on today, 44% People Vote for Leaving Europe, 42% for Remaining in Europe and 10 remain Undecided.
Conclusion – This is a very close battle and we really don’t know what will happen on the 24th. We have a great portfolio today and I am confident that even if the Brexit happens we will come back to the same position in a month assuming that rain falls are good. For those who are risk averse can use options to hedge their positions with a total portfolio cost of 1.5%. I remain confident on the portfolio we hold but I have a duty to manage your risk and keep you more informed that 90% of individuals out there.
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