Brexit, the economy and financial markets

Brexit, the economy and financial markets

Brexit, the economy and financial markets

Britain has voted to ‘Leave’ the European Union (EU) with a vote of 52% leave to 48% stay.

There is little doubt there will be implications following the exit vote, however the magnitude of these implications is up for debate.

What isn’t up for debate is that the UK will be most affected.

Most of the implications are expected to be financial, economic and political;

Financial

  • We do not believe this is another GFC.
  • Credit markets will remain open as banks are much more stable than before the GFC.
  • The UK will lose its seat at the table when it comes to negotiations on European regulation and supervision (even though they still have to comply with many of those rules to do business in the EU). The risk of less market-friendly outcomes for the UK lifts as a result.
  • There may be a prolonged period of uncertainty leading to volatility, however we believe much of this will be confined to the European region.

Political

  • Britain’s Prime Minister David Cameron has resigned.
  • The rest of Europe won’t escape unscathed. A poll published in early May surveyed voters across Belgium, France, Germany, Hungary, Italy, Poland, Spain and Sweden. Some 45% thought their own countries should hold a referendum on EU membership. And 33% indicated that they would vote to leave.
  • Uncertainty as to whether it will proceed as some voters are now feeling ‘Bremorse’ or ‘Bregret’.  Article 50 needs to be invoked and it can be up to 2 years before the UK needs to exit.  The Government isn’t compelled to adhere to the decision of the referendum however given the strong turnout in the referendum, it would be likely to proceed.

Economic

  • The main argument against Brexit was the potential economic costs. These costs are difficult to estimate. But all the serious modelling work suggests the impact for the UK will be large and long lasting.
  • There is a significant risk that the UK economy slides into recession later in 2016 and 2017.
  • There will also be longer-term cost to the UK economy from higher trade costs and less favourable trade access.

Brexit and Australia

  • Interest rates and Australian dollar to fall which may be a positive for Infrastructure assets as well as Listed Property Assets.
  • The general consensus is that the direct impact of Brexit on Australia will be fairly limited. Research shows Australia is less exposed than other countries to UK/European problems, partly because of our Asian orientation.
  • Brexit will add to general market volatility and would see the AUD and interest rates move lower. These moves, especially the lower Aussie dollar, would provide some protection to the Australian economy.

Opportunities for Australia

 

  • As with any significant event such as this there are always opportunities.  For example, Australian companies have long used the UK as a springboard into Europe.  That may change with UK companies viewing Australia as a platform for launching into Asia.
  • The UK has always been a significant investor in the Australian economy.  They remain the second largest foreign investor.  Again, Australia could benefit from any redirection of UK foreign investment flows away from Europe.
What now

What now

As with any significant global event we remind our clients to remain calm and ensure any decisions are well thought out.

The First Financial Investment Philosophy ensures that we are never forced sellers when events like this occur and you continue to have cash in your hand when you need it despite any market movements.

If you require further information on the information above please speak to your Adviser.

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