Brexit: What is it and what does it mean for your portfolio?

What is Brexit?
Brexit is the term that was given to the potential, and now almost certain, exit of Great Britain from the European Union (EU).

Great Britain is not part of the currency union of the EU, but enjoys other benefits that are associated with EU membership such as free trade, deregulated access to European markets, easier labor mobility and visa-free travel.

What will Brexit mean for Great Britain & the EU?
Brexit is likely to be a drawn out process and pose many challenges for both Great Britain and the EU. With the EU accounting for over 50% of Great Britain’s international trade, both economies are likely to be impacted. Credit Rating agencies have already warned Great Britain’s credit rating is likely to be downgraded, with the likely result being higher interest rate spreads, albeit interest rates in absolute terms may fall over the short term. An economic downturn in Great Britain may follow.

Contagion, both in financially and politically, is now a major concern, as the vote has the potential to trigger a movement to reverse the last 30 years of globalization.

The Economist1 provides a snapshot of the issues:

The tumbling of the pound to 30-year lows offered a taste of what is to come. As confidence plunges, Britain may well dip into recession. A permanently less vibrant economy means fewer jobs, lower tax receipts and, eventually, extra austerity. The result will also shake a fragile world economy. Scots, most of whom voted to Remain, may now be keener to break free of the United Kingdom, as they nearly did in 2014. Across the Channel, Eurosceptics such as the French National Front will see Britain’s flounce-out as encouragement. The EU, an institution that has helped keep the peace in Europe for half a century, has suffered a grievous blow.

Managing the aftermath, which saw the country split by age, class and geography, will need political dexterity in the short run; in the long run it may require a redrawing of traditional political battle-lines and even subnational boundaries. There will be a long period of harmful uncertainty. Nobody knows when Britain will leave the EU or on what terms.

What will Brexit mean for my portfolio?
Unfortunately, events like Brexit occur all too often and yet portfolios continue to make money over the long term in spite of the volatility that ensues. Strategies such as diversification and active management come to the forefront in times of uncertainty, as discussed by prominent international fund manager, MFS2:

This sort of environment can create opportunities for investors. We are long term in our focus, and we’re very careful not to confuse the local economy and politics with markets. We invest in international and global businesses, and … [some] of the impacts of the Brexit vote may already be reflected in [share] prices. Against this more volatile backdrop, long-term inefficiencies may emerge. There are great businesses that have been hit hard in the short term, and there are others where risks have increased substantially. This is the type of environment where long-term active managers would be expected to add value. After all, volatility should be our friend over the long term. In fixed income, we continue to look for opportunities where valuations have become dislocated. We’re going through our names and sector exposures, deciding where we want to add or reduce risk. We’re not rushing, as we’re mindful of challenges around liquidity in the near term. We’re largely taking a wait-and-see approach, awaiting improved liquidity. We have already identified specific credits and sectors, so we can move quickly when the environment is conducive to adjusting portfolios appropriately.

Brexit, Grexit, Chinese Stock Market Bubble, GFC, Subprime Mortgages Crisis, Dot-Com Bubble, Asian Financial Crisis and Black Monday are just some of the crises and bubbles to impact on investors over the past 30 years. With financial crises dating back to 3rd Century Roman Empire and the infamous Tulipmania bubble of the 17th Century, these types of events are nothing new for investors.

Focus on what is within your control. You can’t control markets. The only thing you can control is the level of diversification in your portfolio, the quality of your strategy and your discipline in investing for the long term.

Remember: risk is the only thing you are guaranteed when you invest. Invest wisely and don’t let yourself get caught up in behavioral biases.

If you are concerned about your portfolio or retirement savings or need help managing your investments, give our Senior Financial Advisor, Sam Campbell, a call on 02 6883 2200 or email him at .

 
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