Legend tips two banks and rubbishes Brexit threat

'Stay' Above the Brexit Fray and 'Leave' the Fighting to Polls

Brexit!

Don't worry, this isn't yet another piece warning calamity will ensue if Britain leaves the EU - or promising fairy-tale visions of a Norway-style independent paradise. Way too soon for all that, and way too early to handicap the vote. The time to consider a potential Brexit's economic and market impact isn't here yet.

Markets move on probabilities, not possibilities. Brexit is rife with possibilities, but it is impossible to assign probabilities. Not enough information - not even close. David Cameron pledged to renegotiate Britain's EU relationship, then put the new deal to voters by the end of 2017. Negotiations only just started on Tuesday, when Cameron gave Brussels his demands. Now they'll hold summits, haggle, dither, set red lines, cross red lines, set more red lines, lather, rinse, repeat. Voters likely won't have a clear view for several months or more.

Polls this early reveal nothing. It makes for good headlines that 71% of Conservative Party members would vote to leave, but that isn't a representative sample of the UK electorate. Moreover, no pollster can get an accurate read of voters' intent before the agreement is final.

If your pet issue is political integration, your opinion of a deal that exempts Britain from the political aspects of "ever-closer union" will differ wildly from one that doesn't. If extending welfare benefits to migrants is your hot-button, your vote might depend on what Cameron et al decide about free movement of people. If financial regulatory issues are near and dear to your heart, your decision might rest on whether Cameron gets opt-outs for the City of London. Yes, some voters will probably have strong feelings about staying or going regardless of the final deal. But the "it depends" bloc is surely gigantic.

Early polls rarely capture actual intent - the questions are too hypothetical. Choosing how to vote when confronted with the reality of that decision is worlds different from imagining a hypothetical, years in advance. Some early polls on Scottish independence showed a majority supporting a split. So did surveys long before Quebec's 1995 independence vote. Folks liked the idea of independence! But when they weighed the reality of breaking off, they picked the status quo. Polls said how people felt at a moment in time, not what they eventually did.

Campaigns in the 'silly season'

The "stay" and "leave" campaigns are starting to mobilize support, but the hustings won't start for ages. Campaigning is in the silly season - much like early US presidential races, when name recognition drives polling.

Consider: In 2007, a year before Americans elected Barack Obama, he trailed Hilary Clinton badly. On the Republican side, eventual nominee John McCain ran a distant third to the nationally famous New York mayor (Rudy Giuliani) and a Senator-turned-television star (Fred Thompson). This time, a reality television star sits on top. But Donald Trump has about as much of a chance of winning the White House as Baron Sugar (formerly Sir Alan Sugar) has of moving into Number 10.

Even timely polls have a woeful recent history. You lived it in May. Polls also flubbed recent contests in Greece, Canada, Portugal, Argentina, Israel, Denmark and even the US. None foresaw the Republican Party's strong showing in last year's Congressional contests or this month's state elections. Political scientists have theories galore, from the decline of telephone polling to pollsters' increasingly herd-like behavior and fear of publishing outlying results. Whatever the cause, if polls can't get it right on the eve of a contest, when facts are known and opinions fully formed, how can they nail a huge unknown that might be two years away?

The "if-Britain-leaves" predictions are similarly suspect. Those who brag a non-EU Britain can be the new Norway forget Norway is a petro-state and submits to many EU regulations. The "stay" crowd warns of a protectionist backlash if Britain leaves, citing US trade reps' warnings that America doesn't sign bilateral trade deals anymore (just big deals like Trans-Pacific Partnership).

But America will likely have new leadership, with new trade policy, when the Brexit vote occurs (and the current administration finalized two bilateral deals in 2012 - talk is cheap). Sweeping statements can stir emotions - and occasionally cause fleeting volatility as a result. But after short-lived pangs, markets usually see through the fog and resume evaluating probable outcomes.

Relax, and own stocks

So it is far too early to stew over how Brexit could impact markets. But lengthy debates have a silver lining: they let markets discover and pre-price all the potential implications gradually, reducing surprise power. These negotiations will play out publicly, with plenty of speeches, press conferences, summit statements, leaks and draft agreements. There is very little chance politicians can blindside markets with something they cook up behind closed doors. Markets would still have to weigh pros and cons - but the sudden shock potential seems low.

For now, just relax, and own stocks. UK market fundamentals are strong, with a solid economy and bullish political gridlock. Global markets are moving past the late-summer correction, and this bull market should keep running. Here are two fresh picks.

Spain's Banco Santander is among the hardest banks to own. It has seesawed heavily. After two major up-spurts in this bull market, it's amazingly back to its 2009 lows. Arguably the eurozone's biggest bank, it has suffered nearly every headline risk imaginable, yet staggered sideways successfully to where now many simply disbelieve its financials and its CEO - and fear rot among its very many takeovers of recent years. I like the disillusionment. Expect a dividend cut and rising 2016 price with what I see as a 2016 price/earnings (PE) of 11 with a post-cut 4% dividend yield.

Or, my favorite small developed-world bank with marked Eastern European growth potential: Sweden's Swedbank. It grows moderately, has 150 branches in Estonia, Latvia and Lithuania, and is at ten times my 2016 earnings estimate with a 5.5% dividend yield.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.