Last week, I read that American businessman and money manager Steve Eisman – whose story is told in the Hollywood film The Big Short – is shorting (betting that the share prices will fall) two UK banks right now. While not a household name, Eisman is a key figure in the finance world, having correctly called, and profited from the US subprime mortgage crisis a decade ago. Now, he’s got his sight set on UK banks and potentially the whole UK market. Do I think UK investors should be worried?
Bearish stance
Eisman has said that he is currently shorting two UK banks in the lead up to Brexit, but he declined to mention which banks in particular (although traders have speculated that it could be Metro Bank and CYBG and both fell early last week). Speaking at a conference in Dubai, Eisman stated: “I’m shorting two stocks in the UK, but I’ve got a screen of about 50, and I might short all 50 if I think Jeremy Corbyn is going to be prime minister” and also added that “you don’t want to be invested in the UK” if Corbyn is elected.
So, what should investors make of this call by Eisman? Is now the time to dump UK equities?
Brexit uncertainty
I’m not convinced it is. Of course, there is a lot of uncertainty over Brexit and we don’t know how things will pan out. It does pose risks to the UK economy. Therefore, from a risk management perspective, it’s probably not a good idea to own a portfolio that is 100% focused on domestic stocks. Instead, diversifying properly and owning some companies that have operations internationally and in the UK (there are plenty of these types of companies in the FTSE 100), as well as some international stocks, is probably a sensible idea. That way you’ll be more protected if things do go downhill here in the UK.
Bulls and bears
But going back to Eisman, the thing to remember about investing is that there’s always going to be those who are bearish as well as those who are bullish. That’s what makes the market. Societe Generale’s head of global strategy Albert Edwards is another bearish investor who comes to mind. He has been predicting an ice-age for global equities for as long as I can remember. Yet stocks have continued to rise higher and higher, generating fantastic returns for investors.
Long-term gains
Instead of being bearish, I think it’s a better idea to acknowledge that while markets can dip in the short term, in the long run, they tend to go up (a lot). For example, the FTSE All-Share index was created in 1962, with a base level of 100. Yet today, it’s sitting at just under 3,900 points, which equates to a compound annual growth rate of around 7%, without including dividends. If stocks fall, it gives you an opportunity to buy more at lower prices.
So ultimately, I‘m not too concerned about Eisman’s call for now. I’ll keep averaging into the market over time and thinking long term.