With Britain having voted narrowly in favour of leaving the European Union (EU) on 24 June, there has been some initial, aggressive price reaction from investment markets.
We have summarised the immediate market response of each key asset class as at the end of trading on Friday. While markets were generally not expecting this result and much uncertainty still remains around the mechanics and detail of the exit, AMP Capital’s investment teams have provided their insights on the possible medium term implications of Britain’s exit of the EU (Brexit).
To find out more, click here to read our full analysis.
- Currency moves were substantial, particularly weakness in Sterling (GBP), while the United States Dollar index (USD) strengthened about 4% and the Japanese Yen also strengthened. The Australian Dollar (AUD) is in the middle of its range so far in 2016. Many initial currency moves were retraced over the course of the European and US sessions on Friday.
- Apart from GBP, many of the falls in markets have reflected retracements in the rally of the previous week when ‘Remain’ was the widely expected outcome, or retracements to the lows seen in January and February, 2016.
- There is a high degree of uncertainty about the future, as the sustainability of the EU is being questioned and further referendums in the EU are probable. Scotland, which voted aggressively in favour of ‘Remain,’ appears to be laying the groundwork for another Scottish referendum on independence soon. This uncertainty could serve to undermine growth. However, for Eurozone countries, the hurdle to leave the Eurozone is higher than Britain leaving the EU as this involves adopting a new currency, paying higher interest rates etc.
- There is a risk of recession in the UK. However, we will be closely watching the data and monitoring developments in our ongoing assessment of the risks to growth. UK assets appear to have priced in this uncertain future environment. It’s important to note that the UK economy represents only 2.4% of global GDP, so the economic impact of weaker UK growth on the global economy is unlikely to be significant.
- Contagion risks: financial stress on European banks (particularly Italian banks) could be the mechanism that causes the transmission of this event to go from a UK event with a global hiccup to a global recession.
- Investors should continue to gather information and assess the medium term implications.
- AMP Capital’s investment teams located in London have been providing on-the-ground insights and as developments unfold we will continue to draw on their perspectives for the benefit of our clients.
- Markets can overreact when presented with increased uncertainty, which can create dislocations and heightened volatility in the short-term. There will be investment opportunities in this environment as some markets become oversold, and we will continue to carefully consider portfolio strategy and medium term opportunities.
View all AMP Capital Brexit coverage
AMP Capital will continue to communicate with you on concerns you may have about the investment implications of Brexit and to share the diversity of investment thinking across our capability.
We invite our clients to send us questions on matters of concern. Please contact your AMP Capital relationship manager with questions or concerns that you would like us to address via www.ampcapital.com.au/contact-us
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