As you may be aware form the extensive media reports, Britain has voted to leave European Union (EU) and Prime Minister David Cameron has resigned.
The Brexit Leave campaign secured 51.8% of the total vote, in somewhat of a surprise outcome as the general market consensus was that the result would be close but that the British people would end up voting to stay in the EU.
Prime Minister David Cameron, addressed the British nation watched on by his wife Samantha at 5:20pm AEST. The British Cabinet will meet on Monday and a timetable for David Cameron stepping down will be drawn up.
In his speech outside 10 Downing Street, Mr Cameron included the following statements…
“I am very proud to have been Prime Minister of this country for six years….
The British people have voted to leave the EU and their will must be respected…
Across the world people have been watching the choice that Britain has made…
This will require strong, determined and committed leadership…
I have held nothing back…
I was absolutely clear about my belief that Britain is stronger, safer and better-off inside the European Union…
I made clear the referendum was about this and this alone, not the future of any single politician including myself…
I think the country requires fresh leadership…
I will do everything I can as Prime Minister to steady the ship in coming weeks and months…
I do not think I can be the captain to take the country to its next destination…
In my view I think we should have a new prime minister in place by the start of the Conservative conference in October.”
Mr Cameron also added that he would attend the European Council next week to explain the decision that the British people have taken and his own decision, stating that “those on the losing side of the argument, myself included, should help to make it work.” Mr Cameron ended his stoic speech with a quiver of emotion as he stated his love of Britain.
Michael Fallon, the Defence Secretary, stated ” it’s extremely sad news and I would have preferred him to stay on to help make this decision work but it’s his decision and I think it’s the honourable and decent thing to do.” “He lost the argument in the referendum campaign and it does answer your question as to who is best placed to take this renegotiation forward.” Mr Fallon added, however, that “it’s too early to speculate” on who will replace Mr Cameron.” “What’s important now is that we reassure the country, we stabilise the markets and the economy and we reassure our allies that Britain is not turning its back on the world.”
The Bank of England governor Mark Carney has made the following statement…”It will take some time for the UK to establish a new relationship with Europe and the rest of the world. So some market and economic volatility can be expected as this process unfolds, but we are well prepared for this. Her Majesty’s Treasury and the Bank of England have engaged in extensive contingency planning and the chancellor and I have remained in close contact including through the night and this morning. The Bank of England will not hesitate to take additional measure as required, as markets adjust.
Donald Tusk, the president of the European Council, has appealed for calm and says the must be no “hysteria” about the British result. Mr Tusk stated that there will be “no legal vacuum” and EU law will continue to apply until Britain formally leave. There are serious “political consequences” for the UK but leaders are “prepared”.
While England voted overwhelmingly for Brexit, Scotland and Northern Ireland voted strongly to Remain. The city of London also voted 59.9% to Remain but the turnout there was lower than expected because of bad weather. However, the British Midlands and North East regions voted overwhelmingly to Leave. Harry Potter author J. K. Rowling has hinted that she may switch to supporting Scottish independence in a second referendum in the hope of keeping the country in the EU. She suggests that many people who voted no in the last referendum could well switch sides.
Market impacts and your investments
Following the announcement late this afternoon, the British pound immediately crashed to the lowest level since 1985 and the FTSE 250 index plunged a whopping 11.7% in the first few minutes of trading.
In Australia, the news of the pending British exit from the EU caused the All Ordinaries to crash 3.17% before close of trading earlier in the day. From what started off as a positive session in the Australian share market, all sectors finished the day in negative territory with the big miners and big four banks being heavily sold off. BHP shed more than 8% and the major banks dropped between approximately 3% and 4%. The S&P/ASX 200 index closed 168 points down to finish at 5,113. However, over the week the index lost 50 points.
In other markets, the Australian dollar fell by 4%, and Australian bond prices rose by 2-3%, gold rose 5% and oil prices fell by a similar amount.
In each of the above cases, the prices falls and rises after the vote merely reversed falls and rises of similar amounts over the past week, so there was actually little change from this time last week. As stated above, the All Ordinaries index of Australian shares was down 3.17% today but it just gave back what it had gained over the prior week as the Brexit vote looked like going the other way. Similarly Japanese shares were down 8% on Friday, but they had risen 5% over the prior 5 days. There were similar patterns in other Asian markets. European stock markets will probably fall by around 5% when they open on Friday but they had gained 7% over the previous 6 days. (It is a quirk of human nature that we tend to focus on the losses more than we do the gains!)
The benefits of having a high quality and well-diversified portfolio
Events such as the Brexit vote highlight the value of having a high quality, well-structured diversified portfolio utilising market leading research.
Not only are you diversified across asset classes, investment sectors and regions, you are also buffered by currencies during Global market events. Given that the Australian dollar usually sells off along with shares in global shocks, falls in international share prices are usually largely offset by currency gains as the Australian dollar falls. We have been largely un-hedged on currency risk for international shares in your portfolio, which means that falls in international share prices are partially offset by falls in the dollar in sell-offs.
This has occurred in many prior market shocks, and it happened again today. Asian shares fell be around 4% (and European and US shares are also expected to sell off when their markets open Friday night our time). However the Australian dollar also fell by 4% on Friday, so the Australian dollar value of international shareholdings in portfolios was largely unchanged as the currency gains largely offset share price falls.
Another buffer in portfolios is bonds. In broad market shocks, bonds generally gain in value, helping to offset falls in share prices. All your diversified portfolios contain holdings in high quality corporate bonds. Losses on Australian shares were partially offset by gains in Australian bonds in your portfolios. Also, when European and US markets open tonight our time, international bond prices are expected to rise, and this will further help offset falls in international shares in your portfolios.
Other impacts in Australia
Direct impacts in Australia are likely to be relatively minor. The British pound fell 9% on the news of the vote, and that will benefit British exporters to Europe. But the days when Britain was a major trade partner with Australia are long gone. For the first 150 years of Australian history Australia was a British colony and benefited from preferential trade ties with the mother country. But that was all undone when Britain joined Europe. Britain leaving the EU now will have very little direct impact on Australia as the vast majority of Australian trade is now with Asia. The people of Australia are likely to gain some confidence once the Federal Election is decided on 2 July and create a stabilising influence on our economy and markets.
Medium term impacts
More than likely the sudden sell-off in shares and offsetting sudden rally in bonds is likely to stabilise and reverse. Even the bombing of Wall Street on September 11, 2001 and the Japanese tsunami and nuclear crisis in mid-March 2011 were quickly forgotten as markets recovered within a few weeks.
If the Brexit leave vote is confirmed. A full British exit of the EU is likely to require many hundreds of pieces of legislation and administrative steps that may take many months or years to complete. In that time other more pressing issues are likely to take over the headlines. These include the pace of the US economic recovery (following their Presidential election in October this year), the Chinese stimulus program, the military build-up in the South China Sea, and so on.
Aside from the immediate impacts on markets, the likely substantive impact of the Brexit is likely to be a general slowdown in business investment, hiring and consumer spending in Britain and Europe as businesses and consumers wait to see the practical outcome of the vote. The downside of this is that it is likely to slow economic growth and employment, but the upside is that it will also probably lead to lower interest rates for longer – in both Europe and in the US. Thus the impacts on company revenues and profits is likely to be mixed. We will continue to ensure your portfolios have exposure the companies that are best positioned to benefit from these changes.
Longer term impacts
Over the long term the Brexit may well turn out to be the start of a fragmentation of the EU system. The idea of a pan-European economic block had clear advantages in promoting trade, investment and economic growth, especially in the 1970s and 1980s. But the downside has been the crippling creep of increased regulation and taxes, which has hampered productivity growth and innovation. It may well be that the best days for the EU are over and Britain, along with other countries that follow the exit, may progress more quickly free of the stifling bureaucracy of Europe.
The British exit does not provide a clear template for Greece to exit the EU because Greece uses the Euro, whereas Britain has always retained its own currency
Given that your portfolios have built-in buffers to soften the short term impact of sudden market sell-offs, we see no need to make knee-jerk reactions when the mechanics for a British exit and their implications on markets are so unclear at this stage.
We will continue to monitor what is happening economically and politically in Australian and the rest of the world, and ensure your portfolios are positioned in line with your Investment Risk Profiles to get the best possible long term outcomes from the prevailing market conditions.
Please contact me if you have any questions regarding the Brexit and your specific circumstances.