Brexit – What Does It Mean For Australian Investors?
Given the amount of press coverage over the last weeks and months, most of you would be aware that the UK was to hold a referendum (Brexit) to decide whether or not they would remain as part of the European Union. It was always going to be a closely run race with almost all pundits predicting a victory for the ‘’Remain’ voters.
As we discovered on Friday, it was a very close result however, it was the “Leave” voters who ended victorious. Markets reacted immediately with the British pound and their sharemarket falling around 9%. Our share market went from being up 1% early in the day to finishing 3.5% in the red. Markets around the globe headed in the same direction. And David Cameron, the UK’s Prime Minister, fell on his sword. The process now is for Britain and the EU to negotiate a withdrawal agreement. It is thought that this could take as long as 2 years however, no one is really sure as this has never happened before. We are now in uncharted territory.
How Will Brexit Affect Us Here At Home?
One thing we do know for certain about markets is that they don’t like uncertainty. While the withdrawal process muddles through, we can expect more volatility in local and global share markets.
The $US has already bounced on the news and will probably continue to appreciate. One of the possible outcomes at home is that the Australian dollar will continue to fall against the $US. According to Dr. Shane Oliver, Chief Economist at AMP Capital, “this could affect short term confidence and may add to the case for the RBA to cut interest rates again particularly if banks increase their mortgage rates out of cycle due to higher funding costs flowing from an increase in lender caution”.
He also adds that he expects the RBA to lower rates again this year anyway. In terms of our trading with Britain, it currently receives only 2.7% of our total exports so this shouldn’t have a major effect to our bottom line.
Should I Be Making Changes to my Investment or Superannuation Portfolio?
PrimeWealth have a robust and disciplined investment process that will serve you well through all sorts of market conditions. Some of the key factors we use when constructing a portfolio for our clients include –
Your attitude to risk is the determining factor in how much of your portfolio is invested in growth (or risky assets) and how much should be allocated to defensive assets. Typically, growth assets will outperform investment assets over the longer term however they are much more volatile. The reason we invest in both growth and defensive assets is because they are very lowly or negatively correlated. All this means is that when growth assets go down in value, defensive assets tend to go up and vice versa. This is exactly what happened on Friday. While your shares took a hit, the defensive side of your portfolio increased in value. And your defensive assets will continue to pay you income regardless of what happens to the growth component.
Take A Long Term View. Over the longer period, growth assets grow. Defensive assets are there to provide you with income and act as a buffer against the volatility of the growth side of the portfolio. Warren Buffet suggests that the sharemarket takes money from the impatient and gives it to the patient. Those nervous nellies that put everything into cash as shares dropped during the GFC missed out on a 60% increase in the US market the next year. Australian Listed Property bounced back 80%. And some of those people are still in cash today.
Asset Allocation is King. 80% of your total return is derived from your asset allocation, that is, how much of your investment should go into Australian Shares, International Shares, Listed Property, Fixed Interest, Cash or Alternatives. The other 20% is derived from how we invest within each asset class. If you are unsure if your superannuation or investment portfolio is invested in line with your attitude to risk, you should contact your advisor.
What Do I Do Now?
Stay on track. There will be a lot of ‘noise’ over the next few months. Lots of negative front page news and so called experts declaring the end of the world is nigh. Let’s face it, bad news sells newspapers. Your job is to ignore it. There will be more volatility in markets until there is certainty about where the exit process is at. But don’t forget that volatility does not always equate to downwards movements and can often work in our favour.
To give you an example of the significance of Fridays events on the overall US sharemarket, take a look at the chart below.
Even after Friday’s downturn, the US S&P 500 index is up 8% from where it was 6 months ago and 45% higher than it was 5 years ago.
To quote Dr. Oliver once again, “Europe is likely to hang together as it did through its sovereign debt crisis . . . and central banks led by the Bank of England and European Central Bank would run easier monetary policies than otherwise fearing an adverse financial and economic outcome. In which case, Brexit would ultimately be a storm in a teacup with financial markets yet again over-reacting.”
Your advisors at PrimeWealth will be following events as they unfold. Our advice at the moment however is to sit tight and let your advisors focus on keeping you on track to achieving your financial goals.
If you would like to discuss please Contact Us