Brexit: Implications for investors

ST Wong, 27 Jun 2016

Britain’s surprise decision to leave the European Union will cause some market volatility, and also produce some buying opportunities.

Brexit does not point toward a systemic financial crisis like the GFC. But the short-term outlook for Australian shares may be unsettled as the drama reverberates through the market. We observe that stocks with UK businesses, fund managers and institutions with capital markets businesses have endured the largest sell-offs. Our portfolios generally have low exposures to these stocks.

It would be reasonable to expect the UK to post no economic growth for the next few quarters and for EU economic growth to slow. Equally it would be reasonable to expect the Bank of England and European Central Bank to ease monetary policies to aid growth.

Likewise the decision could influence the Reserve Bank of Australia to consider lower interest rates, along with the US Federal Reserve.

We have worked through many crisis situations as an investment team, including the Global Financial Crisis (GFC) in 2008, the dotcom market crash in 2000, and the Asian Financial Crisis (AFC) in 1998. We take many lessons from these experiences.

Experience tells us to look for signs of stress in global liquidity and for contagion – we believe they remain no more elevated than that to be expected for such an event. Liquidity is particularly important and there are no suggestions of widespread liquidity constraints at this point.

There has been no shortage of market volatility this year. Market movements can provide opportunities in companies we find interesting. In this way, volatility offers an incentive for us to act on opportunities in companies, which have strong management and can deliver share-holder value regardless of macro trends. We believe we can prosper by diligently searching for quality companies selling at attractive prices in volatile markets, and in passive ones.