The UK took the world by surprise last week when its citizens voted to leave the European Union (EU). This unprecedented move has left everyone wondering what’s next. Whilst no one really has a clue, and many Australian financial institutions are downplaying the impact, there is good reason to be concerned.
Certainly it appears the financial experts were wrong footed on this one as the markets all rose in the days leading up the UK ‘Brexit’ poll. And subsequent to the poll results I have received countless articles from Australian money managers on what the likely implications are. Commentators such as Alan Kohler say this is just another good buying opportunity, whilst others say that this is just the start of something larger with greater knock on effects and continued uncertainty.
BT say “As part of the global community, Australia can expect to see some direct negative impact from Brexit, though at this stage, they are anticipated to be relatively small.”
Investors Mutual fund manager Anton Tagliaferro says “I’ve been in financial markets for 30 years and these are knee-jerk reactions that are mainly trader driven,” and described the Australian market reaction as “nonsense”.
Commonwealth Bank are more realistic with “The magnitude of the impact on markets and economies is open to debate. The flow chart below traces the likely rolling series of “shocks” – financial, political, confidence and economic – that will drive outcomes. It is hard to see the impact as anything other than negative. The UK will be most affected. But Europe (and the rest of the world) will not emerge unscathed.”
IOOF also provide a realistic assessment with:
“In the past geopolitical events like this have been a buying opportunity – if this is a correction in a bull market – and there have been 12 plus corrections since the GFC. Due to the GFC and the monetary stimulus by central banks it could be said that asset markets are at elevated levels – thus they are in a more precarious position now.
BREXIT does create a lot of uncertainty and in particular noise by economic and political commentators – and markets hate uncertainty. Further, are there follow on events such as the break- up of the United Kingdom if Scotland leaves or other countries seeking exit from the EU, currency instability and so on?
To counter the above arguments it can be said that there will be a policy response by authorities (as in the past ) which will tend to lower interest rates and raise system-wide liquidity) – though we are coming to the natural limits of some of these policies. Second, whilst the UK is important (5th largest economy) in the scheme of the world wide economy, the United States, China, Japan, Germany are much more important.”
In my opinion, what is pretty clear is:
- The fall in the British Pound will act as a shock-absorber and may continue to depreciate and further absorb this economic shock for the UK.
- A UK break-up is now back on the cards with a push by some for Scotland, Northern Ireland and Gibraltar to reconsider their position in the UK. This would be a negative.
- Other European countries will suffer. The day when Brexit results became known, the UK FTSE dropped less than 4%, but most major European markets were down 7-8%. The following day the FTSE was down 2.5% whilst other European markets were mostly down between 3 and 7%.
- The bond bubble has just gotten bigger with the recent flight to “safety”. This may blow out even more with the Bank of England expected to drop interest rates from the already low 0.5%.
- Disquiet among other EU member countries will grow as citizens increasingly pressure their government to allow them to also have as democratic vote on remaining. If another significant economy leaves the EU then their revenue may be irreparably dented….
source: The Telegraph
In conclusion, whilst there are differing views on the financial impact of Brexit, it is simply not possible to conclude that the recent stock market falls will be the end of it. There will undoubtedly be many more developments, any of which could derail the financial markets. It could well be 6 to 12 months before things are clearer – for better or for worse.
This places investors in a very difficult position, especially if they are prone to worry about the inherent share market volatility. It is increasingly likely that the Reserve Bank will drop interest rates again and further make cash an unattractive investment option due to the low returns on offer.