These comments were made at 5.00pm Australian Eastern Standard Time.\u00a0<\/p>\n
1. At this early stage, what will be the impact for Australian investors?\u00a0<\/h3>\n
Expect market volatility to be high over the coming days, weeks and possibly months. The decision to leave has triggered a new uncertain environment and markets will need to understand the impact this vote will have on Britain, and the implications for the European Union (EU) more broadly.\u202f This will take time and hence market volatility will probably be high.<\/p>\n
The severe share and currency market reactions today suggest that joining the selling exodus may be a little too late.\u202fThe history of such events suggests that they can provide buying opportunities when others are panicking.\u202f However, the outlook is so uncertain that we would suggest remaining cautious for the present until the picture is clearer.<\/p>\n
Investors should be reassured that MLC\u202fportfolios have maintained a relatively\u202fdefensive stance in the lead up to this event. We will continue to reassess these strategies as more information comes to light.\u00a0<\/p>\n
2. Why is Britain\u2019s decision to leave the EU so surprising to financial markets?\u00a0<\/h3>\n
Financial markets had favoured Britain would remain in the EU. While there had been considerable swings in the polls in the final weeks of the campaign, on the eve of the vote, the average poll measure suggested a narrow victory to the “remain” side. The Financial Times \u2018poll of polls\u2019 on 22 June showed a narrow poll lead to “remain” but with an \u201cundecided\u201d component of 8%.\u00a0<\/p>\n
Even the betting markets favoured Britain remaining, with bookmakers seeing a 75% probability of Britain remaining.\u00a0<\/p>\n
3. What\u2019s the likely impact on Britain\u2019s economy?\u00a0<\/h3>\n
There are a wide range of views on this. The consensus generally suggests\u202fBritain\u2019s economic growth will struggle, because it\u2019s significantly integrated into the European economy.<\/p>\n
Britain relies on Europe for 48% of Foreign Direct Investment and nearly 45% of exports. So the decision to exit could have a dramatic impact on Britain\u2019s prosperity.<\/p>\n
The average estimate of seven long-term forecasters is that the exit will lower Britain\u2019s economic\u202fgrowth by a net of -3.8 % over the next 15 years, to 2030. See chart 1.<\/p>\n
Chart 1: Estimates of long term effect of Brexit on national income<\/strong><\/p>\n % change in GDP compared with remaining in the EU, assuming trade based on WTO rules<\/p>\n Source: Forecasters, Financial Times, 21 June 2016.<\/span><\/p>\n The economic debate\u202fis whether this loss to Britain\u2019s GDP prospects occurs in the short term, with Britain immediately slipping into recession, or over a long period. The Bank of England and UK Treasury have warned about the possibility of a recession.\u00a0<\/p>\n Should Britain suffer a financial crisis\u202fwith asset prices falling sharply (for example, if Britain\u2019s FTSE share market falls by\u202f-15 %) and credit becomes difficult to access for corporations and consumers, then Britain may slip into recession. \u202f<\/p>\n However there are two key reasons why a British recession is\u202fa possibility rather than the most likely outcome:\u00a0<\/p>\n Both the British and European Central Banks are likely to pledge liquidity supports for European financial institutions, so a major financial crisis due to a credit crunch appears\u202fa low chance.<\/p>\n<\/li>\n Notably Britain\u2019s decision to exit the European Union is a process that can will take up to 2 years under the Treaty of Lisbon requirements. So the immediate negative impact is more likely to be seen through financial market volatility rather than\u202fBritain\u2019s economy suddenly sliding into the Atlantic Ocean.<\/p>\n<\/li>\n<\/ol>\n If the economic \u202fpain of a -4% loss \u202fto GDP \u202fis spread over the next 15 years , this \u202fwould imply that Britain\u2019s long term economic growth would be around -0.25% lower per year. Given Britain\u2019s economic growth is travelling at a 2% annual pace, this is a more modest but manageable negative impact.<\/p>\n So Britain appears more likely to experience slower growth but not an\u202fimmediate recession, given the negative impact should be spread over a longer period.\u00a0<\/p>\n Britain accounts for about 2.7 % of Global GDP and is\u202fmuch smaller than the US and China (around 16% each).<\/p>\n If Britain\u2019s economic activity fell by -4% in the worst case scenario, this would take only -0.1% off global economic growth. Given that global growth is currently running at a +3% annual pace, this does not automatically lead to a global recession or a global financial crisis, as seen in 2008.\u00a0<\/p>\n The more immediate risks to global economic prospects actually come from China\u2019s economic slowdown, weakness in emerging markets such as Brazil and Russia, and the prospect of the US Federal Reserve raising interest rates. \u00a0<\/p>\n This decision highlights political risks and is likely to generate considerable volatility in European financial markets.\u202fBritain\u2019s financial markets are likely to be key focus for turbulence:<\/p>\n Exchange rate: Britain\u2019s exchange rate is vulnerable given they\u2019re running a very large Current Account deficit above -7% GDP which relies on capital inflows.<\/p>\n<\/li>\n<\/ul>\n Higher risk premiums: Britain\u2019s likely to see higher risk premiums for asset prices.\u202fBritain\u2019s share market would be sensitive to the potential higher cost for banks wholesale funding and for corporate credit.<\/p>\n<\/li>\n Long-term involvement in Europe: there\u2019s likely to be considerable angst and doubt about Britain\u2019s long-term involvement in Europe.\u00a0<\/p>\n<\/li>\n Uncertainty in Scotland: the economic case for staying in the EU in terms of economic and security benefits was more persuasive in Scotland than in Slough. So there\u2019s the distinct possibility of another Scotland referendum about staying in the United Kingdom.\u00a0<\/p>\n<\/li>\n Britain\u2019s exit is\u202fa major concern for Europe: The\u202fEuropean project of economic integration and monetary union has been set back. Countries may decide to have their own referendum on EU membership or even being a member of the Euro area. Key countries such as Italy and Spain, who have the euro as their currency, with the European Central Bank setting interest rates, may decide to seek a referendum on their involvement.\u00a0<\/p>\n<\/li>\n European recovery set back: A further polarisation of European politics makes the task of Europe\u2019s economic recovery more difficult. There will be considerable pressure on the European Central Bank to do \u201cwhatever it takes\u201d to keep the euro intact.\u00a0<\/p>\n<\/li>\n<\/ul>\n Likely instability within the UK\u2019s Conservative Party. The Prime Minister David Cameron may resign within days or weeks. Regardless, he\u2019s unlikely to last as Prime Minister until the 2020 General Election.\u202f<\/p>\n<\/li>\n Potential for Scotland to demand a new referendum given their strong support for to remain.<\/p>\n<\/li>\n Likely emergency meeting of the EU to discuss the implications, not just for British \/ EU relations but also other countries with Europe.\u202fThe EU will be looking for a strong commitment to unity of the remaining members.\u00a0<\/p>\n<\/li>\n Negotiations will commence in Brussels in the next couple of months on the terms of exit and any possible subsequent treaties with the EU.<\/p>\n<\/li>\n UK commences the review to abolish or rescind laws and agreements relating to current relations with the EU (especially where EU laws take precedence over UK laws).<\/p>\n<\/li>\n Within 2 years of triggering the exit process, the UK would likely no longer be bound by existing EU Treaties.\u00a0<\/p>\n<\/li>\n<\/ul>\n![\"\"](\"http:\/\/internal.clientcommunity.com.au\/uploaded\/level\/1285\/Image\/Market_update\/MLC_chart-1-brexit.jpg\")
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4.\u00a0 What\u2019s the likely impact on the Global economy?\u00a0<\/h3>\n
5. What does this outcome\u202fmean for European and British investors in the short term?\u00a0<\/h3>\n
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6. What next?\u202fA possible trajectory of events<\/h3>\n
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