Investment Corner: The fallout from “Brexit”

Wow, now that was unexpected! The voting population of the UK have shocked the world and global financial markets by voting to leave the EU.

Like any long term relationship, it wasn’t a perfect one, but still the world wasn’t expecting the UK to pack their bags and walk away from the EU. In reading the commentary post the result, even those who voted to leave are now starting to really think about the consequences. According to data from Google trends, searches have surged for “what happens if we leave the EU”, and “what is the EU?” following the result – suggesting to me that many didn’t even have a clue what they were voting on.

So what does Brexit mean for investors?
The result of the U.K. referendum is unprecedented: No country has ever left the 28-nation EU. As with the first time of anything, it is full of uncertainty which translates to volatility as people scramble to make sense of the new world which presents itself. Clearly, Brexit opens up risks, both in the short and long term.

Shorter term: The British pound has weakened considerably, which will lift prices of imported goods and could hurt investment in the UK. It now sits at its lowest level against the US dollar since 1985. Equity markets reacted quickly with Global stock markets falling upon the news dramatically. Oil was down (prediction of less demand). Gold was up (investors wanted shelter from growth assets). Short-term credit markets are also tightening, which puts companies reliant on short-term financing at risk (banks especially).

Longer term: The Brexit could encourage other European political parties, who want to dump the euro currency or leave the EU, particularly the likes of the PIIGS (Portugal, Italy, Ireland, Greece and Spain). As they carry massive debt burdens they’re unable to shed so long as they’re part of the EU. Brexit could cause a domino effect with far-reaching implications. The result is set to have major repercussions for the future of the UK, since Scotland and Northern Ireland voted to remain. England and Wales both voted to leave, though voters in the capital city London were significantly in favor of remaining. Commentators now predict a second referendum for stanchly pro-EU Scotland to secede from the UK.

Uncertainty is high at the moment, and we will continue to provide relevant information as it comes to hand. As with previous events which have sparked volatility, here is what we do know…

  • Volatility is part of the game that is long term investing, and volatility creates opportunities for long-term investors.
  • The sharemarkets globally dropped 3% or more on Friday, and as short term traders and speculators rush to cover their positions this week there will be spikes of volatility in the coming days and months.
  • This will take a long time to play out, with at least 2 years of difficult negotiations ahead.
  • This is not a time to panic and deviate from your long term strategy.

Our message remains the same. Do not react to short term news, and remember that asset allocation is part of your strategy for a reason. Your defensive and boring assets importantly provide a buffer in these times to cushion the impact of volatility and ensure you aren’t forced to sell assets while their value has fallen. In the words of Warren Buffett, “you only find out who is swimming naked when the tide goes out.”

There have been many articles published over the weekend with commentary of the impact of Brexit, here are a few good ones which I felt are worth a read:

The coming weeks will no doubt be characterised by ongoing volatility as the markets seek to process and forecast the longer-term ramifications of the UK’s departure from the EU. We will continue to monitor the situation closely and will provide further commentary the implications both here and globally become clearer. Until then, happy investing.

 

Post contributor:

Pete Pennicott - Pekada
Pete Pennicott
Financial Planner @ Pekada

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The information provided on this website is general in nature and does not constitute advice. You need to consider with your financial situation and your particular needs prior to making any strategy or products decision. Pekada will endeavour to update the website as needed. However, information can change without notice and Pekada does not guarantee the accuracy of information on the website, including information provided by third parties, at any particular time Unless otherwise specified, copyright or information provided on this website is owned by Communitas. You may not alter or modify this information in any way, including the removal of this copyright notice.