In April we noted the uncertainties posed by Brexit: the British referendum about leaving the European Union. On Thursday older Britons, mainly living in traditional middle and working class areas, turned up at polling booths and voted for the United Kingdom to leave the European Union. This was a vote for stronger immigration control (as EU rules require the free flow of people within the union). It was also a vote of no confidence in international institutions. Younger Britons voted to stay in the EU, but too many of them stayed home and the ‘leave’ vote carried the day.
So what does Brexit mean for your investments and superannuation?
In the immediate term…
- EU rules provide two years for negotiation about the details for the exit, and no doubt a transition period will follow so any direct economic effects are quite a few years away. And as Kerry Stokes, billionaire chairman of Channel Seven said: “Sensible people will negotiate sensible outcomes”.
- …but markets loathe uncertainty, so the index of world markets fell 4.4% on Friday. Investors can expect less wild market fluctuations over the coming weeks but for markets to remain weak for some time.
- Businesses hate uncertainty too, so investment plans involving Europe will be reconsidered and very possibly delayed.
In the short term, Australians should anticipate:
- A weaker share market (but likely less dramatic than Friday’s falls).
- A lower currency as investors flee ‘risk assets’ like commodities and the Australian dollar.
- Interest rates to stay lower for longer in Australia and elsewhere as central banks try to ease the world economy back onto a growth trajectory.
In the medium term…
- Consumer and business caution will inevitably result in lower economic growth worldwide than would otherwise have been the case. Just how much lower, no-one knows.
- There will be increasing speculation about other European Union exits, possibly looking at Denmark, Sweden, Greece, the Netherlands and Hungary. Even in core France, a large proportion of the population are seen as being ‘euro-skeptics’. This of course means more uncertainty (so more market weakness).
- The UK will face its own unity problems. Both Scotland and Northern Ireland voted to stay in the EU and may reconsider their membership of the UK, in order to rejoin the EU as independent entities.
- Brexit is described as anti-immigration, nationalist, anti-globalization, and right wing. Donald Trump’s success in US politics is described similarly, so U.S. voters and commentators will give increasing weight to the possibility of a Trump Presidency. Ironically this may be galvanizing anti-Trump forces in the U.S. but in the meantime it means more uncertainty.
- The strongest ‘leave’ demographic was 65 years and older, whereas under 25 voters voted to stay, suggesting that in the long term demographics may reverse UK opinions about the EU. In fact it may not take that long. There are already calls for a second referendum.
In the long term…
- On the plus side, Brexit may force the EU to re-shape itself and to fix serious flaws in terms of its treaties, ultimately leading to better social and economic outcomes.
- Brexit is part of a much larger trend toward nationalism and closed borders. This is not positive for the world economy or security.
So what should Australian investors do about Brexit?
Most importantly, don’t panic. The worst thing an investor can do is sell after heavy falls. The economy and the market will do as they always do: recover. In 2008, amid the Global Financial Crisis, Australian shares fell 40%, but in 2010 they rose 30%. The perfect recipe for disaster was to sell in panic at the bottom then miss the recovery. Investors who held their nerve from 2005 to 2009 made a positive return of around 20%.
As one of the world’s most successful investors, Warren Buffet said during the Global Financial Crisis, “be fearful when others are greedy, and be greedy when others are fearful.” Just a month ago, contemplating the possibility of Brexit, he responded with “I certainly wouldn’t change my investment in businesses.”
So, as uncertainty causes share markets to drift lower, braver investors with cash reserves and eyes firmly on the long term will start to look for opportunities to buy into stocks at relatively cheap levels.
What are your thoughts?
Were the Brits mad to vote to leave? Will they find a way to reverse their decision, with a second referendum perhaps? Or will this trigger (much needed) restructuring of the EU treaties? An optimist might hope that the EU will indeed restructure and that the UK will respond by deciding to stay after all.
Join the conversation — leave a comment below and let us know what you’re thoughts are.