Our summary of Brexit

June 27, 2016

This morning, I sat through a special Brexit briefing from Colonial First State and I wish to summarise their thoughts as best I can below. Obviously there is a huge amount of uncertainty at present and as such these thoughts aren’t gospel, at best they are a guestimate for what might happen.

 

You will read and hear many things over the coming weeks, some will be sensationalised, some will be inaccurate and many will be written with a vested interest………please be careful before taking any of what you read as gospel, including this.

 

I have done the best I can at this stage to provide a balanced viewpoint, but some of it will no doubt turn out to be incorrect. Anyway here goes;

 

What is “Article 50” and when does it have to be invoked?  The UK needs to invoke Article 50 to formally advise the EU that they wish to leave. Once they have done this there is then a two year time frame to leave the EU.

 

Interestingly, there is no time frame on the UK to actually invoke Article 50, so they could just procrastinate, however the EU is a tad unhappy with the UK and it is believed they will try and force the UK to invoke Article 50 sooner rather than later.

 

The referendum was non-binding. As such the British Parliament can actually choose to ignore the vote. However it is considered unlikely that they would do this. David Cameron (their PM) has said the vote reflects a majority view and as such it should be followed through. He has also said he won’t be the person leading this new era and as such has said he will resign.

 

The Scot’s might yet get the final say.  Scotland voted to stay (62%) and there is legal thought that Scotland actually has to approve of the Brexit in the British Parliament for it to happen. As such they might still have the power to stop it. There is uncertainty surrounding this issue.

 

Most likely scenario. Despite the above uncertainty, it is most likely that the Brexit will occur. The EU has said it won’t be an amicable divorce, but they weren’t deeply in love in the first place. You’ve got to love the Europeans!

 

Economic impact. The UK was tipped to grow at around 2%p.a. It is now considered they will fall into recession in the short term. Their trade will suffer as they have to sort out new agreements and as such their whole economy will slow down. Political uncertainty will impact Businesses willingness to invest and this will become self-fulfilling.

 

What about the rest of the world? The UK is not a large part of the world economy and the impact is nowhere near what it would be if a similar thing was to occur in the US, China or Japan. Nonetheless it reinforces that world growth will likely be low for the foreseeable future and this means the low interest rate environment will continue.

 

Is this another GFC? It doesn’t appear so; the GFC started in the financial sector and spread from there. This is a political event which the financial markets have reacted to. In addition Governments around the world are now better equipped to handle such “shocks” and they have already reacted by saying they will pump liquidity into the economy if required.

 

What will happen to interest rates around the world? It is likely that the US will delay any rate rises, the UK, Australia and parts of Europe will likely lower their rates.

 

What will happen with Equity markets around the world? There were significant falls around the world on Friday, funnily enough the UK were at the lower end of these declines, with a fall of 3.1%. Declines in Europe were larger and Australia and the US were about the same as the UK.  

 

What does the future hold for Equity markets? The short answer is further volatility as markets hate uncertainty and that is what we will witness in the coming weeks. No one, especially the UK, appears to have any real idea about where to from here. It’s as though they took a vote, but no one really thought the Brexit case would get up, so it’s unchartered territory. Very much a watch this space environment.

 

What is the medium to longer term impact? The main impact is that global growth is now forecast to be lower for longer. That will lower return expectations across most asset classes. Over the longer term it is envisaged that the UK and EU will work out their trade agreements, etc. and the rest of the world will just get on with life.

 

Will it cause a contagion impact in the EU? Probably the great unknown and the issue that causes most concern for markets. There is thought that fringe political parties will gain some traction in disenfranchised areas and it will depend on how influential these become. Angela Merkel is seen as a very strong leader in the EU and while ever she is there it is assumed the status quo will continue. But it is very much a watch this space situation.

 

Are there any positives for the UK? Well given they voted for it, you’d hope so! The following are seen as positives: significantly reduced membership fees being paid to the EU (last year they paid 13billion pounds); regulation will no longer be dictated by the EU; the UK can control their own immigration laws again (this was seen as a major factor); and the UK can negotiate their own trade deals again.

 

There will be many more opinions forthcoming over the next few days and weeks and we will keep you updated in due course.

 

Robert

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