Globe and Mail business writer Jennifer Dowty, c. June 15, 2015. Credit: The Globe and MailThe Globe and Mail
- The latest developments: How Brexit happened and what’s next
- Global markets shaken
It is a monumental day, and one investors won't soon forget. Britons voted to leave the European Union, the U.K. Prime Minister resigned, and equity markets around the world are plunging.
The shockwaves are set to grip North American equity markets. The Dow opened down 500 points at the open and the TSX was seeing declines of more than 300 points.
But here's my main message for today: The aggressive selling pressure we are seeing around the globe, which is amplified by high frequency trading and algorithmic trading, will create buying opportunities for long-term investors, particularly for domestic companies with no or little European exposure.
Both the S&P 500 index and the S&P/TSX composite index had been trading at forward price-to-earnings multiples that are close to their historical highs. This damage to equity markets will create more compelling valuations.
It was a close vote, yet the "Leave" camp was victorious with 52 per cent of Britons voting to leave the European Union compared to 48 per cent voting to remain in the EU. Earlier this morning, U.K. Prime Minister, David Cameron, a clear supporter of the U.K. remaining in the EU, announced his resignation.
This news has created uncertainty, and in turn, uncertainty creates volatility. There are concerns surrounding the U.K. economy and implications for future trade relations. In addition, confidence regarding the unity of the European Union has been shaken, with speculation that other members of the EU may also leave in the future.
This uncertainty has increased volatility. The VIX Index, or Chicago Board Options Exchange (CBOE) Volatility Index, is a measure of the 30-day implied volatility of S&P 500 index options. This index, commonly called the "fear gauge", has spiked to over 24, signalling heightened nervousness in the markets right now.
When fear rises and the VIX spikes, it has represented buying opportunities. For instance, earlier this year, the VIX peaked at over 28 on Feb. 11. On that day, the S&P/TSX composite index closed at 12,087 and just over four months later, on June 23, the Index closed at 14,131 - a return of 17 per cent. Similarly, the S&P 500 index rose to just under its all-time high of 2130, climbing to 2113 on June 23 from a closing value of 1829 on February 11.
Back in the summer of 2015, Chinese fears and slowing global economic growth shattered equity markets worldwide. The VIX index spiked to over 40 on Aug. 24 and the S&P/TSX composite index closed at 13,053. One week later, the TSX index had rallied 6 per cent, closing at 13,859 on Aug. 31. The S&P 500 index closed at a low for the year at 1868 on August 25, but just over two months later, rallied back 13 per cent.
Jennifer Dowty is the Globe and Mail's equities strategist