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Brexit update – The UK votes to leave the European Union

June 28th, 2016

BREXIT update
from Frontier Advisor, KC Low

On Thursday 23rd June the UK conducted a referendum to decide whether to remain or leave the European Union (EU). By a margin of 52% to 48%, and with the highest turnout in a UK-wide vote since the 1992 UK election, the UK decided to leave the European Union.

Following the announcement of the referendum results on Friday 24th June, most global share-markets have fallen and the British Pound has weakened significantly. Global bond yields have also fallen to new lows across many countries while there is growing expectation that the Bank of England will cut interest rates in coming weeks. Other central banks such as the European Central Bank and the Bank of Japan may also opt for further easing measures in coming months.

The weakness in various investment markets is understandable given the amount of uncertainty that this vote brings. No country has ever left the EU and it is not clear a) how long it will take Britain to renegotiate an exit from the EU; and b) how it will be able to negotiate new trading agreements with the remaining 27 member countries in the EU. The UK is also in political turmoil; the British Prime Minister, David Cameron, has announced his resignation and there is also pressure on the leader of the opposition to resign. It is not clear whether a new UK election needs to be called and when.  Unusually, the majority of the current members of parliament were said to be in favour of remaining part of the EU, so other changes in parliament are plausible.

While the longer term impacts remain to be seen, in the shorter term this uncertainty is likely to result in weaker economic growth in the UK over the coming 12-18 months; for example businesses are more likely to hold back on hiring and investment plans in the UK until there is more clarity over the future. Some industries, such as global banks, have previously suggested that they would move staff out of the UK if the “Leave” vote went ahead. In this scenario unemployment is likely to rise and consumer spending could fall.

In the short to medium term, most impact of the referendum is likely to be contained to the UK economy and to a lesser extent Europe. There will be some concern over how committed the remaining members of the EU are to staying within the Eurozone and the handling of the UK’s exit may be used as a means of discouraging other members to leave. There may also be some concerns over further “contagion” effects into other non-European markets and economies globally.

However, on a more positive note, while not completely removed from the fallout in investment markets Australia is well insulated economically from these developments as our exports to the UK and Europe are far smaller than exports to China, the United States, Japan and the rest of Asia. The Reserve Bank of Australia is also in a position to ease monetary policy further, particularly if the June Quarter inflation figures remain below the 2-3% target level.

Frontier Advisors provided this update to First super. The views expressed are of Frontier Advisors.

This publication was issued by First Super Pty Ltd (ABN 42 053 498 472, AFSL 223988), as Trustee of the First Super superannuation fund (ABN 56 286 625 181). It does not consider your personal circumstances and may not be relied on as financial advice. Content was accurate at the date of issue, but may subsequently change.