Last Friday saw the results of the British Referendum, with a surprise victory going to the leave voters, who voted 52 per cent in favour of Britain leaving the European Union (EU).
In the lead up to the referendum, markets globally were predicting that Britain would likely remain part of the EU. That’s why on Friday we saw significant falls across all markets as investors were shocked by the result and did not have the risks of a leave vote factored into markets.
So what does this all actually mean for investment markets? In the short term it is likely that we will see a period of ongoing uncertainty until markets come to properly understand just what it means for both Britain and the European Union.
Morgans Financial Limited Director of Strategy, Michael Knox wrote a recent article about the potential economic impacts of Britain voting to leave the EU. In this article he highlighted that the economic impact to Britain would not be determined by Brexit itself, but by the deal that it negotiates with the EU as a result of Brexit.
The market will be concerned by the structural changes to Britain’s interactions with Europe in terms of both trade and immigration. Given the complexities, it could take an extended period of time to determine these outcomes. Britain’s exit could also add fuel to the rise in popularist political movements in Continental Europe, which may lead to other nations pushing to leave the EU. Both of these factors give rise to higher uncertainty. Central governments do however stand ready to support the financial system offering a floor in market sentiment.
Despite the uncertainties, it is important to remember that markets always move past these events, despite how uncomfortable they feel at the time. You only have to think back to January/February this year to remember that markets thought that the world was headed for a recession due to a slowing Chinese economy and a falling Chinese currency. As we well know now, this didn’t eventuate.
So, yes this event has caught markets by surprise and yes negotiating future trade and immigration with the EU will be complex for Britain, however it will get done and given Britain is the second largest economy in Europe, we believe that it will be completed in a manner that is favourable for both Britain and Europe. - Justin Still in an investment adviser with Morgans Financial Limited
