Flattery and Battery

Let's start with the table. This shows price changes since the close on 23 June, polling day when a narrow win was still expected for 'remain', until the end of the month; the companies are selected either from holdings in the Bearbull Income Portfolio or from contenders for the portfolio (Bearbull, 24 June). The relative movements in the main indices are logical enough. Since Brexit mostly looks like a wound inflicted on the UK's domestic economy, shares in FTSE 100 companies, which derive around 40 per cent of profits from overseas, should hold up better than those in the comparative tiddlers in the FTSE Aim All-Share index, where the exposure to the UK is much higher. Factor in the weakness of sterling - down 10 per cent against the US dollar over the same period - and the overseas earnings of Footsie companies become more valuable, too.

A mixed response

Hence the response of shares in GlaxoSmithKline (GSK). While it may be debatable that the Brexit vote has made the ailing pharma giant 12 per cent more valuable, it should be clear that its value relative to UK-orientated companies in general has improved.

What's trickier to explain is Glaxo's share price performance compared with the other companies in the table that generate over 90 per cent of their revenue outside the UK. For example, the exposure of speciality chemicals supplier Elementis (ELM) to the UK economy is minimal. Apart from just 5 per cent of its $679m turnover being derived from the UK (Elementis accounts in US dollars), only $40m of the group's $574m in fixed assets is invested in the UK, in just one of 14 production sites worldwide. The same applies to Vesuvius (VSVS), which supplies consumables to the steelmaking and foundries industries. Of its 69 production sites, four are in the UK; of £1.01bn invested in fixed assets, only £132m is in UK sites.

Yet the share prices of these two have diverged markedly from Glaxo's since the referendum result, and Vesuvius's price has been hammered. True, trading at both Vesuvius and Elementis is hardly strong. But the factors behind this have been known for months and haven't been influenced by the Brexit result. Meanwhile, one has to question whether Glaxo's shares really are the repository of quality that their price surge implies given the group's tepid sales growth and overdistribution of dividends.

There are also questions about those companies that are focused on the UK. Shares in both restaurants operator Restaurant Group (RTN) and housebuilder Bovis (BVS) have got it in the neck, but is this down to the market's reflexive response to nasty news or have these companies' long-term prospects been damaged? If UK consumers have become permanently poorer, then Restaurant Group, which runs eateries such as Frankie & Bennie's, may have lost value irretrievably. This is a plausible scenario even if it does not tell us whether the shares are cheap or dear at their current price. Something similar might be said of Bovis with the caveat that the UK's pent-up demand for more homes plus the scope for supply to be increased by government decree means that its long-term profitmaking potential may not necessarily have been eroded.

Where does this leave us? Chiefly with the thought that the market's initial response to Brexit has been broad-brush, so share prices have been flattered or battered a bit indiscriminately. Therefore expect a good bit of mean reversion in the coming weeks. That means I won't rush to sell those holdings in the Bearbull Income Portfolio that have fallen through their stop-loss level. Nor will I get too depressed by the portfolio's 6.1 per cent month-on-month fall in June - its worst monthly result since March 2014. Instead, take the positives - the fund's distribution for the first half of 2015 was 9 per cent higher than the previous first half, which is much in line with the rate at which payouts have risen for its 18 years' existence.

Income Portfolio distributions