The U.K.’s Brexit vote had global stock markets reeling, the pound sterling plummeting and interest rates tumbling on Friday … but not everything was in free fall.
Far from it.
When panic like the kind that was touched off by the Brexit hits financial markets, the safety trade takes off, and it’s going on in full force right now.
That giant sucking sound you hear is the rush of investors out of riskier assets into so-called “safe havens” like defensive domestic equities, gold, the dollar, Treasuries and a few other select currencies. If nothing else, the Brexit underscores the importance of building a diversified portfolio.
Be forewarned, however, that the market’s initial reaction to stunning events such as the Brexit almost always overshoots. It’s not necessarily wise to rush blindly into defensive pockets of strength. If you’re piling into gold miners, for example, you could easily overpay. (The idea is to buy low, not high.) It’s going to take two years or longer for the U.K. to negotiate its Brexit from the European Union. A lot can happen between now and then.
Moreover, the morning’s market carnage proved to be less severe than futures — and media rubbernecking — had suggested ahead of the open.
If nothing else, the damage done by the Brexit vote is a teachable moment for the virtues of a balanced portfolio. A look at what’s holding up well in this crash — or even eking out gains — shows that good defensive bets abound.
Here are some stocks and a couple of exchange-traded funds that were relative winners in an otherwise ugly day, and could continue to stay strong even if Brexit fears continue to pull this market lower.
Brexit Survivors: Barrick Gold (ABX)
This one is a no-brainer. Barrick Gold Corporation (USA) (ABX) — along with every other gold miner — rallied sharply after the U.K. voted to leave the European Union.
Gold always does well in times of panic, and when gold is good, gold miners typically do even better.
ABX jumped as much as 9% soon after the opening bell on a spike in gold futures. ABX is the biggest name in the subsector by market cap, but naturally, every gold miner went along for the ride.
Indeed, major gold ETFs like the SPDR Gold Trust (ETF) (GLD) rose by as much as 5% soon after the opening bell. (Importantly, gold stocks actually fell from premarket peaks, but strengthened into the close.)
Brexit Survivors: CME Group Inc (CME)
Financial sector stocks were among the hardest hit by the pro-Brexit vote, but one name stood out for gains:
CME Group Inc (CME) — the largest operator of futures and options markets — was enjoying decent gains.
The massive surge in trading volume for gold, currencies and interest rate products, among others, is a good omen for CME’s bottom line in the current quarter and beyond as the world adjusts to this new period of uncertainty.
A humorous note in the financial space: Brazil’s Banco Bradesco S.A. (BBDO) rallied thanks to the board’s approval of a stock repurchase program.
Brexit Survivors: Public Storage (PSA) (And Other REITs)
Real estate investment trusts were another rare part of the financial sector that held up pretty well in the Brexit selloff. Public Storage (PSA) — the largest REIT in the subsector — shrugged off the bad news to put up modest gains.
Makes sense. PSA does have international operations, but they are overwhelmingly exposed to Europe, not the U.K. Perhaps investors are betting that Britons forced to leave the continent will need mini-storage while they sort things out at home.
PSA is benefiting from the safety trade. All that money coming out of stocks has to go somewhere. Healthcare REITs like Omega Healthcare Investors Inc (OHI) also held up well.
Brexit Survivors: Consolidated Edison (ED) (And Other Utilities)
The utilities sector was broadly higher and Consolidated Edison, Inc. (ED) was one of the larger stocks leading the way. This makes ample sense, of course.
Utilities, with their poky growth and generous dividends, are classic defensive stocks. And it’s not like ED has any exposure to the U.K. … that is unless Britain wants to somehow tap the power grid in Yonkers.
Just don’t forget: Yields on dividend stocks fall as their prices rise.
Brexit Survivors: Dr Pepper Snapple (DPS)
Anxiety about U.S. corporate profits is overblown. After all, the U.K. contributes just 4% to S&P 500 earnings. But generally speaking, stocks with less exposure to the U.K. are doing better amid the Brexit.
You’d think a U.S. consumer goods company would be a good bet to hold up in such an environment, and lo and behold, there is one. Dr Pepper Snapple Group Inc. (DPS) is made up of more than 40 different businesses — all of which operate in North America.
So yes, DPS can withstand the Brexit.
Just remember that beyond the U.K., the fizzy drinks industry is in secular decline. And a week ago, Philadelphia passed the nation’s first soda tax — an ominous sign.
Brexit Survivors: Altria Group (MO)
But where those international tobacco names slumped, U.S.-focused Altria Group Inc (MO) continued to ring up new 52-week highs. Indeed, MO is now up about 16% for the year-to-date vs. a fractional gain for the S&P 500.
Tobacco stocks are another classic defensive bet. Investors buy them for the hefty dividends, not growth, and MO has been in a steady uptrend for a year now.
Brexit Survivors: Dollar Tree (DLTR) (And Other Retailers)
The retail sector was decidedly mixed following the Brexit, but some names find themselves in a pretty good place. For example, Dollar Tree, Inc. (DLTR) could actually benefit from the fallout.
As a dollar store, DLTR has paper thin margin as it is. A stronger dollar therefore makes the cost of anything it imports cheaper. And if the Brexit leads to economic malaise or recession, penny-pinching consumers should lift DLTR’s traffic.
Be that as it may, the primary reason for DLTR’s strength is that it’s been soaring ever since it crushed Wall Street’s profit last month.
Other domestic facing retailers like Home Depot Inc (HD) also held up OK.
Brexit Survivors: Kroger (KR)
As the nation’s largest supermarket operator, it makes sense that The Kroger Co (KR) would be a good place to hide during a Brexit crash. The closest thing it has to international exposure are stores not far from the Canadian border.
It should also help that a stronger dollar — and lower gas prices — will make imports cheaper and put more discretionary cash in consumers’ pockets.
But the proximate cause for KR’s post Brexit rally is that it announced a dividend hike and share buyback program. Kroger raised its payout by 14% and replaced its prior authorization with a new $500 million buyback program.
Brexit Survivors: PowerShares DB US Dollar Index Bullish ETF (UUP)
Predictably, the U.S. dollar soared against the pound as the Brexit vote tipped in favor of “Leave.” The beating was so bad that the pound hit lows not seen in 30 years.
The easiest way for normals to bet on U.S. currency is the PowerShares DB US Dollar Index Bullish ETF (UUP). This fund tracks a futures index that seeks to replicate the performance of being long on the dollar against six major currencies.
A stronger dollar spells good news for importers and anyone planning a European vacation, but it also makes U.S. exports more expensive. It also hurts revenue when international sales are converted into dollars. Crude oil — priced in dollars — is another victim.
Frankly, the economy would be better off with a declining currency rather than a rising one.
Brexit Survivors: iShares 20+ Year Treasury Bond ETF (TLT)
The king of the safety trade is U.S. government debt, particularly long-dated Treasurys. As popular as gold may be, it’s tiny compared to the Treasury market, which is the largest and most liquid on the planet.
Long-dated Treasurys are a natural place to hide when the market is going through a period of risk-off. They offer higher yields because of their protracted maturities.
As such, the iShares 20+ Year Treasury Bond ETF (TLT) was up by considerably more than 2% by the middle of the session. At the same time, the Dow Jones Industrial Average gave up more than 600 points.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.