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Here's what you need to know about Brexit

On Friday 24th June 2016, the UK announced the results of its Referendum regarding its position in the European Union (EU) and its member states. Much to the surprise of Analysts and in contrast to all prior polls, the people of Britain voted in a 52% vs 48% split decision to leave the EU. This announcement was swiftly followed by the resignation of UK Prime Minister David Cameron.

As a result of these changes, markets reacted negatively with the level of uncertainty about the future of Britain and the EU coming to question. The British Pound sunk to a 31 year low and markets around the world dropped slightly as the news was digested by traders.

It is extremely important to note that following this referendum vote that nothing immediately changes. This referendum was not legally binding and must now go through Parliament to legislation before the exit negotiations begin. Exit negotiations themselves are expect to take approximately 2 years so nothing is expected to be completed until late in 2018.

Economic Implications

While it was a shock to the global economy, the ramifications are expected to be limited. The UK Economy is only 2.5% of Global GDP and current arrangements mean that trade as usual will continue between Britain and its main trading partners (although the lower value of the pound could reduce the amount of trade). Most importantly, implications for the banking system are expected to not be systemic. Thus the global economy is not expected to grind to a halt.

There is a concern regarding the levels of business confidence and the uncertainty caused by the long delays over the negotiation period. It is expected that the market may continue to be volatile over the near future as future news filters through. Given the current levels of slow growth around the world, and already low interest rates in some places, this is concerning. Central Banks are expected to be accommodating and will continue to keep interest rates low (and may go lower) to help kick-start the global economy.

Lastly, it is important to note that this issue is fundamentally a political issue and not an economic one. The referendum comes as a result of people unhappy with political decisions and that nothing as yet as changed in the global economic market.

Implications for Investors

Besides the uncertainty over the future of Britain and the EU, nothing has fundamentally changed except for the value of the pound and other financial assets. Financial markets are notoriously volatile and often over react over the short run, as people make rash judgements and decisions. As a result of this we should not be too concerned about the recent volatility in the markets.

Time will tell what real economic impacts this decision will have, and we expect that share markets will rise after the initial drop from knee-jerk selling. In addition, investors with fixed interest investments will also benefit from the falling interest rates.

Overall unless individual circumstances have changed, investors should not be selling out of their assets for prices less than they were last week. Patient investors should be thinking about using the volatility to their advantage as any contributions you make now would go further than they would last week.

Resources: Graham, B. (June 25th 2015). Brexit: What's Next? Retrieved 27th June 2016. http://www.ampcapital.co.nz/nz-blog/june-2016/brexit-what-s-next
This blog post has been prepared to provide general information and does not constitute 'financial advice' for the purposes of the Financial Advisors Act 2008 (Act). An individual investor should, before making any investment decisions, consider the information available in the relevant Product Disclosure Statement and seek professional advice. While every care has been taken in the preparation of this document, Apex Advice Group Limited make no guarantee that the information supplied is accurate, complete or timely and do not make any warranties or representations in respect of results gained from its use. The information is not intended to infer that current or past returns are indicative of future returns. These views are subject to change depending on market conditions and other factors.
Image courtesy of dan / Freedigitalphotos.net