Have Brexit fears been overcooked?

Brexit fears have dominated the market’s movements in recent weeks.

Share markets around the world have tanked with more than US$2.3 trillion being wiped from the value of equities, according to The Australian Financial Review, while there has been no shortage of news headlines forecasting the next big crash.

The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) itself has lost 4% this week, with companies such as Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and BHP Billiton Limited (ASX: BHP) hit particularly hard.

However, those fears appear to have eased overnight with Wall Street making a recovery, while the Sydney Futures Exchange is also pointing to a positive start. The odds of Britons electing to exit the European Union at the referendum vote on 23 June appear to have subsided, although the outcome of the poll will still be a close call.

Sadly, part of the pullback may be attributed to a suspension in campaigning following the death of Jo Cox, a Labor member of parliament who was campaigning to keep Britain in the European Union. According to reports, she was murdered following her weekly meeting with constituents in a West Yorkshire village which led to both sides of the European Union referendum debate to suspend all campaigning for Thursday.

Indeed, Brexit is a legitimate concern for investors. Should the country elect to exit the EU, it would create a high level of uncertainty regarding how Britain’s economy would cope and how that would impact the rest of Europe. Clearly, Europe is a key part of the global economy so there is the fear that such a move could have a contagion-like effect.

That could still happen, even with the odds of Brexit occurring diminishing overnight. However, investors do need to recognise that this isn’t the first threat that we’ve faced. Yes, some threats do materialise into something much larger, but others, including the US fiscal cliff and tensions between Russia and the Ukraine, can tend to be overblown.

It should be noted that I am not playing down the impact that either of those events had on the individuals and groups directly impacted by them at the time. But in relation to their ongoing effect on global share markets, hindsight shows that they were certainly overblown. The same could also be said for ‘Grexit’, which referred to a similar situation as Brexit whereby Greece held a vote to leave the Eurozone.

The ASX 200 has fallen sharply this week which can almost certainly be attributed to fears over Brexit. Investors typically hate uncertainty, and it can be enough to drive them away from the market in droves.

But as Albert Einstein once said, “In the middle of difficulty lies opportunity.”

While it mightn’t be wise to go out and buy any old stock trading below its 52-week high price, investors should remain on the lookout for opportunities to purchase high-quality businesses that are trading at beaten-down prices.

Whether or not you’re prepared to put more money to work right now, the most important thing is to remain calm. Volatility is a normal part of investing which can certainly make us doubt ourselves in the short-term. But it will pass, and those who remain cool will likely be the ones left smiling.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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