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What Does The Exit Of The United Kingdom From The European Union Mean To You?
Much to everyone’s surprise the United Kingdom has voted 1. Hesitancy now exists with stock markets around the world as it sinks in what exactly this means.
Adding to the doubt, the British Prime Minister, David Cameron has resigned, with a new leader set to be in place by October. The current lack of stability means that the markets are likely to remain volatile for some time. The new Prime Minister can vote against the outcome but there is significant doubt that this will happen.
Analysis given by major banks, the UK Treasury, the private sector and other economic resources shows that leaving the EU would cause a downturn in the UK economy. Currently we have seen a reactionary fall in share markets and bond yields, along with significant moves in currencies.
How does the UK’s vote affect International Markets?
It is believed that there will be a relatively small impact on the global economy, with experts suggesting a drag of around 0.2% on global growth over the next year or so. That said, with global growth already soft, the impact on market sentiment will not be a positive.
The area that has suffered the most significant fall is the financial stock across European markets. The Spanish bank stocks are down around 11%, Italian banks by around 13%, while German banks are down by around 3% up until the 24th June 2016 1.
However, defensive sectors including Real Estate Investment Trusts (REITs), Consumer Staples and, somewhat surprisingly, Commodities have performed better over the week to 24 June.
There hasn’t been significant impact to US markets, however their bank stocks have dropped 3% over the week 1.
How Does it affect You and the Australian Economy?
In terms of the Australian market, we know that the total direct exposure to UK earnings for the ASX 300 is in the region of 5% 1. This includes businesses which are focused on the UK, as well as the pockets of earnings from other companies. 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 ASX 300 fell over 3% on Friday 2; this sharp reaction was in part a result of the strong positive moves we saw in the days leading up to the referendum as the market largely discounted the chance that Britain might vote to leave. The ASX 300 had gained 2.2% for the week by Thursday’s 2 close and Friday’s fall was probably exaggerated by the sharp swing in opinion as the result proved the market wrong. Sectors’ performance on Friday was unsurprising; resources and banks were both down around 4%, offshore earners down broadly 3.5%, while REITs and defensive industrials were down 5% 1. Again, this must be seen within the context of the week’s prior moves
“…Some commentators 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…”
In the end analysis, Brexit has shown the benefit of being diversified.
What should you do now?
While we may see swings in the markets, it is expected these may eventually level out, given that central banks will step in, and overall, there is likely to be a moderate impact to global growth.
While headlines can be unsettling, it is important to remain focused on your overall investment strategy. To discuss your own situation, please contact us here.
This information (including taxation) is general in nature and does not consider your individual circumstances or needs. Do not act until you seek professional advice and consider a Product Disclosure Statement.
1: The post-Brexit investment landscape – June 2016. Millennium 3.
2: www.abc.net.au/news- 28/06/2016