As you are no doubt aware Britain voted to exit from the European Union by a margin of 52% to 48%, with a higher expected voter turnout of 71%.
The shock waves have certainly begun whilst the world comes to grips as to what this exit will mean not only to Great Britain but also to Europe and the balance of the world.
We are entering uncharted waters until the situation becomes clearer.
In the meantime we know financial markets do not like uncertainty and this has been reflected in the immediate falls and increased volatility seen in stock markets and currencies around the globe, including Australia’s financial markets.
What are the effects, both permanent, as well as temporary, on Britain and Europe?
We discuss these.
Where to now for Britain, Europe generally and how will Brexit affect Australia?
There is now a petition with three million signatures calling for another vote. The likelihood of another vote is remote. And theoretically the Prime Minister of Britain could ignore the referendum result because parliament is sovereign and referendums are generally not binding in the UK. A question could be put to the Parliament and MPs vote.
In either of these situations, this just creates more political and economic uncertainty and that is the last thing Britain needs.
We have to assume they will exit the EU by invoking this Clause 50 of the Lisbon Treaty to inform the EU that they will leave, but how long that takes is still to be determined.
There will be issues with Northern Ireland and Scotland who voted to remain. Will they leave Britain, which Scotland has already tried, and join the EU on their own?
UK trade will be affected as will those businesses who use the UK as a gateway to Europe. Will they leave the UK and set up in continental Europe?
There are so many uncertainties for Britain and who will be their Prime Minister to lead and effectively manage them through this change?
An immediate concern is the risk of recession in the UK. But, it’s important to note that the UK economy represents only 2.4% of global GDP, so the economic impact of weaker UK growth on the global economy is unlikely to be significant.
We mentioned in last week’s commentary that a fear of contagion could occur with a ‘me too’ attitude by some European countries who also feel the EU is not improving their own economic position. Like the UK, immigration and refugee issues are to the forefront for nationalist politicians to tap into an unsettled feeling of Euro scepticism.
Unpaid debt is a concern in many European countries (Greece, Spain, Portugal, Italy etc), so they may well be watching closely what happens to Britain and see if there are any opportunities for them by also leaving and see a currency devaluation and their debt being left in limbo. In other words, someone else’s problem!
Just as the new leadership in Britain has to work out their role to steer Britain, the Euro leaders face the same, if not a bigger challenge. For them Britain is one thing, but a similar occurrence with other European nations would be tumultuous for them and the world generally.
Over the weekend, the statements by the president of the European commission, Jean-Claude Juncker that, “it doesn’t make any sense to wait until October to negotiate the terms of their departure …..I would like them to get started immediately.” The implication here is to send a message to Britain and others – no deals here, leave now and suffer the consequences.
Our tyranny of distance is a positive to these events. We are far enough away that the majority of our companies and businesses will not be affected greatly by Britain’s exit.
Those that trade heavily with them may be affected in the short term – but many do not. As investment manager Anton Tagliaferro of Investor’s Mutual said, “It makes no sense for Australia to panic. Financial markets move in unison. Things are short term. I think when people sit down and look at companies on a stock-by-stock basis in a week’s time or a month’s time they will sit down and go, ‘well, is Suncorp really impacted by the UK? No. Is AGL really impacted by the UK? No.’
This is not to say Europe suffering a major upheaval won’t affect us at all, as the European Commission is our 3rd largest trading partner behind China and Japan. However, in recent times we have formed stronger links in the Asian economic basin with some important bi-lateral trading arrangements.
In addition, on Monday Australian Prime Minister, Malcolm Turnbull said if he was returned, he wanted to establish a “collaborative, cooperative framework” with New Zealand. He spoke of ‘teaming up with New Zealand in a bid to negotiate new trade and immigration deals in the wake of the Brexit vote in the UK’. (ABC News)
Markets can overreact when presented with increased uncertainty, which can create heightened volatility in the short-term. There are usually investment opportunities in this environment as some markets become oversold, and we expect our appointed investment managers of your portfolios to carefully monitor portfolio strategy and medium term opportunities.
Researchers from AMP Capital have recently said, “Models suggest that the Australian Dollar (AUD) is close to fair value at present. There is a risk that the AUD strengthens on the perception that Australia is far removed from the immediate economic fall-out and that it’s higher rates available here support currency valuations. If this scenario eventuates, the RBA is likely to respond with rate cuts. We were expecting another rate cut this year from the RBA, and are now more highly convicted of this view. The market is currently pricing in 150bps (1½%) of rate cuts over the next year.”
The rest of 2016 and into 2017 will have more events that will impact on markets. As we said, the medium term broader implications of the Brexit referendum lie with Europe and, particularly, relate to the sustainability of the European Union as we know it; anti-EU political movements have seen strong support in countries like Italy, France and the Netherlands, whilst the economic recovery from the Eurozone crisis in 2011-12 has been weak with relatively high unemployment rates and banking sector under pressure.
In August Greece will have its debt position reviewed.
From a political perspective, Australia has an election this Saturday, Italy has a referendum in October, the US has its election in November, whilst France and Germany will have general elections in 2017.
Generally speaking, elections have historically proven to be times when the markets become sluggish and sometimes volatile in the short term, looking ahead we see no reason why these upcoming elections will be any different from the past.
While it is important to keep track of events like these that affect financial markets and your superannuation and investment savings, it is important to remember that sensible investing is for the long-term and that sometimes, short-term decisions can do more harm than good. A good investment strategy that keeps discipline and focus on the long-term is essential.
Please contact us for any queries you may have in regard to your own personal situation.
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