BREXIT: HOPE OR GLORY

Riccardo Briganti, Investment Specialist – BT Advice Research 27 June 2016

The UK public voted to exit the European Union (EU) on 23 June 2016 with 52% in favour of leaving.

What happens now?
Referendums in the UK are not legally binding and the decision to exit remains with the UK Government. Nevertheless, it appears unlikely the Government will overrule the referendum results. David Cameron’s immediate announcement that he will resign as Prime Minister signals a capitulation of the Government’s ‘Remain’ proponents.
The formal notification of exiting the EU requires that Article 50 of the Lisbon Treaty be invoked. The PM has stated that it will be his successor’s job to invoke Article 50, while the Leave camp appears to be suggesting there is no hurry in formalising the exit procedures with the EU.

Once the EU is formally notified under Article 50, a two year process of exiting the EU will commence which includes negotiating trade accords and terms of access to the EU market.

Political repercussions will extend to Europe
The failure of the ‘Remain’ proponents will see new UK leadership and a policy rethink on both sides of the political divide given a majority of MPs in both major parties supported remaining part of the EU. There have already been renewed calls for a Scottish independence vote, where the vote was in favour of remaining in the EU.

There will also be an increased focus on other EU members looking to exit the EU and the monetary union. There have already been calls from political parties in Spain, Portugal and Italy to consider their own exit strategies.
As a result, EU infighting on whether to “punish” the UK to send a message to other potential exiters or to ensure orderly transition to maintain trade and relations is likely to further increase European political unpredictability.

Economic impacts diminish as you move away from the UK
The UK will suffer the greatest negative economic impact due to reduced trade and uncertainty affecting investment decisions and consumption. However, the fall in the British Pound and concerted central bank action is likely to mean that worst case scenarios are less probable.

The economic impact on Europe is expected to be less severe, although continued uncertainty surrounding the stability of the EU and the UK trade impact may mean further monetary stimulus will be forthcoming.
The global growth impact is expected to be minimal, with postponement of expected US interest rate rises and lower bond yields acting as growth stabilisers. Furthermore, Asian growth prospects are not closely linked to the fortunes of the UK.

Portfolio positioning
The UK’s exit from the EU has sparked significant currency and equities market upheaval. However, it should be kept in mind that similar equity market falls were seen in August last year and again in January this year, which were followed by recoveries.

It is anticipated that the level of uncertainty resulting from Brexit will continue for some time, due to the absence of a modern precedent to make valid comparisons and the likelihood it will spark calls from other countries to also exit the EU. Nevertheless, significant geopolitical events ranging from the Greek/European debt crisis and the US government shutdown/debt ceiling issues in 2013 have occurred in recent years. Financial market stability has generally returned more quickly than seemed likely while in the thick of events.

Shares have fallen across the globe, but the greatest immediate impact appears to have been on European markets rather than UK equities. European shares fell more than 8% in the day following the vote while UK shares suffered a 3.2% fall and US shares were down around 3.5%.

The BT Advice model portfolios have exposure to UK and European equities through managed funds held in the International shares component of the portfolios.

The portfolios also hold fixed interest investments which will have benefitted from investors moving their money to more defensive assets in a “flight to safety”. This will partly offset the fall in equities, reinforcing the benefits of holding a diversified portfolio which includes different asset classes.

Long term portfolios for long term investing
The BT Advice model portfolios are constructed based on long term asset class expectations and client risk tolerance. They take into consideration the expected volatility of share markets with more conservative clients having a lower exposure to shares, while those with a greater risk tolerance and a longer investment horizon have a higher exposure to shares.

Keeping in mind your long term objectives, if current events have made you question your risk tolerance you should contact your adviser to discuss further.

Quick Questions

When does the UK leave the EU?
There is two year period where the UK will negotiate their exit from EU. However, this two year period does not begin until Article 50 of the Lisbon Treaty is invoked.

What will be the economic impact on Australia?
The direct impact on the Australian economy is likely to be small. Trade with the UK is limited, particularly goods exports which make up less than 2% of Australia’s total exports. Services exports, mainly tourism, is larger and could be impacted by the weaker UK economy and fall in the British Pound.
While the direct impact is likely to be small, the Reserve Bank of Australia may be inclined to cut official interest rates again to shore up negative sentiment that may result.

What should I do with my investment portfolio?
While these specific circumstances are unprecedented, other significant geopolitical events have occurred in recent years including the Greek/European debt crisis and the US government shutdown in 2013. The main lesson from these events has been to resist the temptation to act hastily, as share markets have tended to recover. Decisions made to exit equities after sharp falls risks locking in losses and not participating in any subsequent recovery.

Is my portfolio sufficiently diversified?
If your investment portfolio is not diversified across the different asset classes of shares, fixed interest, property, cash and alternatives, you should speak to your adviser about the benefits of a more diversified portfolio. This is also the case if your portfolio is skewed within a specific asset class, for example if you hold a significant portion of international equities in UK and European shares.

Should I hold a more conservative investment portfolio?
Portfolios for conservative investors will have a lower exposure to shares and greater exposure to less volatile investments such as cash and fixed interest. However, this may come at the cost of lower returns over the long run.
Keeping in mind your long run objectives, if current events have made you question your risk tolerance you should contact your adviser to discuss further.

 

 

 

Disclaimer
This information has been prepared and issued by BT Financial Group which is the wealth management arm of Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian Credit Licence 233714 (Westpac), and is current as at 26 June 2016. Material contained in this publication is an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. Any projections are predictive. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. Past performance is not a reliable indicator of future performance.

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This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs.
Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs.
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