Investment Update:
Brexit and the impact on market performance
Dominating the news headlines is the United Kingdom (UK) vote to leave the European Union (EU).
Our Investment Team has been working to bring you a considered view of Brexit and potential impacts to your
investment portfolio. We provide you an overview of Brexit and recent market performance, and potential short and
medium term implications for your portfolios.
Brexit and recent market performance
The recent referendum outcome has no immediate consequence to economic linkages between the UK and the
EU. The vote may lead to an exit from Europe’s free trade area, but the process for bringing this about will require
multilateral negotiations between UK, the EU, and 50 other countries that are part of the World Trade Organization.
This will not happen overnight. It may take anywhere from 2 to 10 years to resolve such matters; Greenland went
through this process and it took about 3 years. Over this period, it is quite probable that this will fuel heightened
tension within and across the countries that comprise the EU. In brief, this event adds significant and prolonged
uncertainty to an already fragile economic environment.
What is the possible impact on economic growth? The UK represents about 3.5% of World GDP. A recent study by the
International Monetary Fund (IMF) report a potential fall in UK growth by 1% (best case) to 6% (worst case). Hence this
implies a first order worst impact on World GDP growth of -0.2%; this suggests the impact on the Australian economy
is likely small. Furthermore we note that the UK represents only about 3.4% of Australia’s trade with the world.
These big picture statistics mask what may be significant and material distortions for various economic segments
(agriculture, pharmaceuticals, and financials) that could be most affected.
The uncertainty resulting from these developments have clearly rattled financial markets. There has been a general
flight to safety implying that equity markets around the Globe and especially those in Europe and in Emerging
Economies have fallen sharply. The British Pound has fallen in value and the Australian dollar also has lost ground
to the US Dollar. Investors have bid up bond prices resulting in lower yields; credit instruments have fallen in value.
Central Bankers have responded by continuing to pledge their support for stability and willingness to inject liquidity as
required.
Will this persist? As we have suggested, the expected impact on world growth is not material, and hence we do not
expect current events to lead to a prolonged adverse performance of equity markets. We believe that it is now less
likely that the FED will raise rates and hence that yields may fall further. The uncertainty from the recent events and
what may unfold are not however likely to dissipate any time soon. Hence this dark shadow will continue to loom over
asset markets for some time.
Short Term Implications for your Portfolios
We have been acutely aware of the sources of fragility in Financial Markets. The large imbalances of the Chinese
economy pose a serious and material risk to investors holding Australian shares. Our investment committee has
endorsed a policy aimed at diversifying client portfolios across asset classes, initiating allocations to alternative
investments, and bringing domestic and foreign equity allocations to near equal weight. We would thus urge you to
meet with your adviser to assess whether this would require any shifts in your current allocations.
Investment Update:
Brexit and the impact on market performance
Opportunities may arise from the current dislocations and we remain confident that the managers we have hired on
your behalf will capture some of these opportunities while preserving your capital. We have been and continue to be
in contact with these managers; they will be providing periodic updates which we will make available to your financial
advisers.
Medium Term Implications for your Portfolios
The recent events support our thesis that we are in a low growth and low yield world with heightened uncertainty. Thus
we remain confident that our defensive and well diversified stance will serve our clients well. Our research initiatives
to enhance our clients’ exposure to alternative investments and fixed income assets have continued to progress. Our
investment team remains in regular dialogue with the Investment Committee (IC) and the Working Groups comprised
of Financial Advisers and our External and seasoned IC members. The IC remains ready to act as required.
We hope this note has been useful to you and we will continue to maintain an open dialogue with you about market
events. Should you have any further questions regarding this update, please don’t hesitate to contact your advisor.
Kind regards,
Findex Investment Team (FIT)
Findex Advice Services Pty Ltd | ABN 88 090 684 521 | AFSL 243253 | trading as Prescott Securities
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