On Friday afternoon (our time) it was announced that the UK population had voted by a narrow margin to leave the European Union (EU) – a move dubbed “Brexit”.

As a consequence, financial markets have reacted quite sharply, most notably the UK equity market and exchange rates for the pound. So what happens next, and what does this decision mean for investors here in Australia, and what are the longer term implications?

Short term, British and European leaders will begin negotiating the terms of Britain’s departure from the EU. Under EU rules, this could potentially take 2 years, during which time the political and economic uncertainty will likely lead to further market volatility. Keep in mind that for the moment, the UK is still a part of the EU – the exit consequences will take some time to play out. This uncertainty often favours less risky assets initially, as shown by the initial market reaction, but may ultimately lead to buying opportunities for quality shares and other assets.

According to AMP Capital’s Dr Shane Oliver, UK Treasury and the OECD have estimated the impact to the UK economy to be around 5% of GDP over 15 years. Of greater concern to markets is the possible contagion effect – that is, the fear of other countries choosing to exit also, unravelling the EU.

Henderson Global Investors’ Ben Lofthouse notes that there are opportunities from the news – for instance the lower pound will provide some advantage for UK exports, and UK listed companies with significant overseas earnings may prove to be a bargain. Active international share managers stand well placed to outperform their peers on this basis.

The impact for Australia’s economy is likely to be low. The UK accounts for just 2.7% of our exports, and there are arguments that the outcome may be favourable for increased trade with the UK.

This historic event will undoubtedly dominate headlines for quite some time, and lead to significant adjustments for the European people, businesses and economies. Expect volatility, and some medium term headwinds to UK growth, but consider that excessive negativity may in fact reveal opportunities to pick up some oversold assets.

And as always please contact us for any advice or assistance.

Published : 27 Jun 2016

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