In the days leading up to the U.K.’s European Union referendum, all signs were pointing to a landslide “remain” vote but when 52% of the votes materialized for the “leave” camp people “in the know” were left scratching their heads. How could so many people have been incorrect? The answer is very simple and the data was available to have figured out the mistake before the vote concluded. It all boils down to weighting the political bets.
Betting on election results is nothing new. In presidential races beginning in 1896, the New York Times provided daily betting quotes using bookies as sources through agents at every stump and whistle-stop to seek out information and gauge popular sentiment.
An excellent analyst, Nick Colas from Convergex, recently included the following in a note: “It is simple (too simple, we believe) to say that the only market battle this week is the Brexit vote. That conflict seems largely decided. As we’ve noted in prior notes, the gambling odds available from offshore bookmakers have never forecast a “Leave” vote as the likely outcome. Current odds of a Brexit are 25% and “Stay” is at 78%. Yes, a few polls went the other way last week, but more recent surveys show “Remain” in the lead.”
In the weeks leading up to the vote, up to and including Thursday morning GMT, the odds makers claimed there was only a 76% probability of remaining in the EU. However, this was skewed by the size of the bets. The odds makers were looking to offset risk not take a side on the final voting result. People who were voting on “Stay” wagered more per bet and the votes were weighted by the bet amount. The greater amount of capital being wagered skewed the probability towards the “Stay” camp. As of Thursday afternoon NY time, the bookmakers showed a 17% probability of leaving despite the number of bets being placed that day were 2:1 for leaving.
This tidbit of information came from by watching the twitter feed of British Political Betting Site, “Ladbrokes Politics”. Most of the day the site contained updates like this but towards the end of the day, this tweet confirmed the number of bets was leaning towards “Exit”. Anybody watching the twitter feed would have seen this piece of information.
Investors and multinationals saw only the economic advantages of remaining in the EU. From that perspective, a “remain” vote made perfect sense. So when relying on dollar weighted bookie statistics rather equally weighted exit polls, investors seemed to see what they wanted to see. In the minds of the voters however, the political and social impact of remaining in the EU outweighed the economic consequences of leaving.
I’m a bottoms up investment analyst who looks for hard data points that show an inflection in profit growth and the Brexit vote does not change my stock selection methodology. It did however, give me better entry points to add to my US focused investments including Lumber Liquidators ($LL), Nordstrom ($JWN) and Brightcove ($BCOV).