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 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.
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