Britain' Referendum - Image From Facebook

Great Britain’s Referendum 23 June

Britain to Leave the European Union (EU)

From a financial perspective the result was a surprise and possibly a very poor economic decision. International trade and investment in Britain may be disrupted for some time and add to the mix political uncertainty.

Assuming the British Government runs with the referendum result they will advise the European Union of the decision to leave. This triggers a two year block to negotiate the terms of exit inclusive of terms of future trade with the EU. Britain must also negotiate with other countries inclusive of the U.S. and China that currently have trade agreements with the EU but not Britain. This could take a decade to work through (seems a long time but the GFC was eight years ago).
The likely impact upon Britain may be reduced investment into the country, less favourable terms of trade, poor consumer and investor sentiment, the pound remains under pressure and a short-term recession results. In a global economic sense this was hardly a great time for the Brits to inflict a negative shock.

So what does this mean for Australia?

Well, at the time of writing the Australian Share Market was up 31 points. We reacted last Friday however I suspect the volatility that has become familiar will remain. The direct economic effects on Australia should be relatively small however in the near term clearly negative. In terms of trade about 1.5% of our goods exports go to the UK and about 8% of our services exports, so tourism may see a larger impact than any other sector. Commodity prices may remain weaker for longer and the Banking sector may come under some price pressure subject to their level of exposure to the UK.

What about investment?

In terms of our portfolio construction we have little to zero direct exposure to Europe and the UK. We will feel the short term effects on investment valuation however I expect earnings and consequently investment income to remain. The Reserve Bank may look to cut interest rates again and this will put pressure on Bank Deposit and Fixed Interest however should also be supportive of the Share Market. Overall I see this as more opportunity than material long term threat. Fortune will most likely favour the brave however I remain prudent and true to our strategy of favourable yield at reasonable risk.

Heath