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June 28, 2016

Brexit - What are the implications for investors?

Against the opinion polls leading up to the Brexit referendum, the people of the UK have voted to leave the European Union (EU). Many are now wondering what the implications are for their investments.

The Facts

  • The terms under which Britain’s withdrawal will be negotiated; they have two years from the point at which the EU exit clause is triggered to agree how the transition will occur.
  • It is not known what the ultimate trade framework between the EU and UK will be, nor what the latter’s new taxation and regulatory environment will look like.
  • While there is no precedent for a country that withdraws from the EU to maintain an economic relationship, there is a template for how European countries such as Norway and Switzerland have agreed upon a beneficial economic relationship with the EU whilst still sitting outside its formal membership.
  • The UK’s departure from the EU could have a global economic effect, given that the UK is roughly the world’s fifth largest economy in addition to British businesses delaying investment decisions in an environment of uncertainty.
  • There are still significant questions about the political ramifications for the UK as the Prime Minister has announced he will stand down, while the Leader of the Opposition is facing a possible motion of no-confidence from his own party and Scotland’s First Minister has indicated that its independence is back on the table after last year’s failed vote.
  • It is also not known what the second and third-order effects will be for the EU itself. This decision is likely to bolster anti-establishment political forces on the Continent and may reinvigorate their efforts ahead of elections in both France and Germany in 2017.
  • It is also not known what the central banks are working on to ensure that the financial system remains liquid and able to respond to periods of stress. Several examples of reasonably coordinated actions have been seen this year to smooth patches of uncertainty. It is expected that they would continue to ensure that the financial system remains functioning normally as we move through the transition period.

What are the implications for investors?

In this vein, this is a political event, notwithstanding the likely economic consequences that we have and are yet to be seen. It is generally not considered a liquidity event, such as that which saw markets freeze up in the Global Financial Crisis. Liquidity has not drained from the system – if anything it may increase as central banks act to shore up confidence. Global market volatility is likely to be higher than usual for a period – but markets still appear to be functioning normally.

In terms of the Australian market, the total direct exposure to UK earnings for the ASX 300 is in the region of 5%. The direct impact on the Australian market is limited in terms of corporate fundamentals. From this point it seems likely that we will see a period of volatility as the markets digest this news and make some sort of attempt to price in the implications.

The most important issue, when an event of this magnitude has occurred, is to ensure that one avoids the gravitational pull of short-term emotional decisions based on what may or may not happen as a result of this event. The global political landscape has clearly changed and at times, markets may have a tendency to over react, possibly creating opportunities for future wealth growth.

Modoras remain committed for your financial confidence, if you have questions or are not sure what action to take, please contact a Modoras Executive Planner on 1300888803.

IMPORTANT INFORMATION: This blog has been prepared by Modoras Pty. Ltd. ABN 86 068 034 908 an Australian Financial Services and Credit Licences (No. 233209), located at Level 3, 50-56 Sanders St, Upper Mt Gravatt Q 4122. The information and opinions contained in this fact sheet are general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individuals personal circumstances have been taken into consideration for the preparation of this material. Any individual making a decision to buy, sell or hold any particular financial product should make their own assessment taking into account their own particular circumstances. The information and opinions herein do not constitute any recommendation to purchase, sell or hold any particular financial product. Modoras Pty. Ltd. recommends that no financial product or financial service be acquired or disposed of or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this fact sheet can change without notice. Modoras Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication.


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